Risk Solutions leases 6,200 square feet of office space in Marlton, New Jersey, which expires on June 30, 2016, 1,814 square feet of office space in Fort Wayne, Indiana, which expires on March 31, 2015, 1,297 square feet of office space in Downers Grove, IL, which expires on December 31, 2016, and 6,580 square feet of office space in Enfield, Connecticut, which expires on November 30, 2018. IPA Family leases 7,000 square feet of office space in Tampa, Florida, which expires on October 31, 2016. IPA Direct leases 2,974 square feet of office space in Lake Mary, Florida, which expires on September 30, 2015. Specialty Benefits leases 3,951 square feet of office space in Eagan, Minnesota, which expires on March 31, 2016.
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, 2013. The senior management of IHC provides direction to the Company through a service agreement between the Company and IHC. In 2013, 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, short-term statutory disability benefit product in New York State ("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 international health, occupational accident, and pet insurance products.
While management considers a wide range of factors in its strategic planning, the overriding consideration is underwriting profitability. Management's assessment of trends in healthcare and in the medical stop-loss market play a significant role in determining whether to expand Independence American's health insurance premiums. Since Independence American reinsures a portion of all of the business produced by Risk Solutions, and since it is also eligible to earn profit sharing commissions based on the profitability of the business it places, Risk Solutions also emphasizes underwriting profitability. In addition, management focuses on controlling operating costs. By sharing employees with IHC and sharing resources among our subsidiaries, we strive to maximize our earnings.
The book value of the Company’s stockholders’ equity increased to $12.68 per share at December 31, 2013 compared to $12.59 per share at December 31, 2012.
Net income per share amounted to $0.43 per share, diluted, or $3.4 million, for the year ended December 31, 2013, compared to $1.16 per share, diluted, or $9.6 million for the year ended December 31, 2012.
The Company recorded an increase in the combined ratio in the fully insured health line of business for the year ended December 31, 2013 primarily due to higher claims in certain assumed group major medical business.
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 2012, 2011 and 2010 underwriting years that increased (decreased) by (4.9), 12.1, and (1.4) 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 2013 underwriting year at December 31, 2013. The impact of these reasonably likely changes at December 31, 2013, 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 in the 2013 Consolidated Statements of Income.
Predicting ultimate claims and estimating reserves in medical stop-loss is more complex than fully insured 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 aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Fluctuations in results for specific coverage are primarily due to the severity and frequency of individual claims, whereas fluctuations in aggregate coverage are largely attributable to frequency of underlying claims rather than severity. Liabilities for first dollar medical reserves and disability coverages are computed using completion factors and expected loss ratios derived from actual historical premium and claim data.
The Company has classified all of its investments as either available-for-sale or trading securities. These investments are carried at fair value with unrealized gains and losses reported in 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 Income for trading securities. Fixed maturities and equity securities available-for-sale totaled $69.2 million and $60.8 million at December 31, 2013 and 2012, 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 Income, using the constant yield 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.
assumptions, inputs and methodologies used in pricing those securities, and corroborate it against documented pricing methodologies. Validation procedures are in place to determine completeness and accuracy of pricing information, including, but not limited to: (i) review of exception reports that (a) identify any zero or un-priced securities; (b) identify securities with no price change; and (c) identify securities with significant price changes; (ii) performance of trend analyses; (iii) periodic comparison of pricing to alternative pricing sources; and (iv) comparison of pricing changes to expectations based on rating changes, benchmarks or control groups. In certain circumstances, pricing is unavailable from the vendor and broker pricing information is used to determine fair value. In these instances, management will assess the quality of the data sources, the underlying assumptions and the reasonableness of the broker quotes based on the current market information available. To determine if an exception represents an error, management will often have to exercise judgment. Procedures to resolve an exception vary depending on the significance of the security and its related class, the frequency of the exception, the risk of material misstatement, and the availability of information for the security. These procedures include, but are not limited to; (i) a price challenge process with the vendor; (ii) pricing from a different vendor; (iii) a reasonableness review; (iv) a change in price based on better information, such as an actual market trade, among other things. Management considers all facts and relevant information obtained during the above procedures to determine the proper classification of each security in the Fair Value Hierarchy.
Premiums Earned. Premiums earned increased 52%, or $43,425,000 from 2012 to 2013. The Company currently has three lines of business. Premiums relating to medical stop-loss business increased $7,977,000. This is due to an increase of $8,406,000 in medical stop-loss premiums assumed by Independence American, offset by a decrease of $429,000 in medical stop-loss premiums written by Independence American. Premiums relating to fully insured health consisting of group major medical, fixed indemnity limited benefit, short-term medical, dental, vision, hospital indemnity, occupational accident, pet insurance, international medical, and individual health increased $33,405,000. The increase is primarily due to an increase of $15,388,000 in pet premiums, an increase of $11,206,000 in group major medical premiums assumed by Independence American, an increase of $3,072,000 in international medical premiums assumed by Independence American, an increase in small group business written by Independence American of $1,319,000, and an increase in occupational accident business written by Independence American of $954,000. Premiums relating to group disability increased $2,043,000 due to higher DBL and LTD premiums assumed by Independence American. For the year
ended December 31, 2013, 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 26% of IHC’s medical stop-loss business. There were no significant changes to these percentages from the prior year. For the year 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 year 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.
Other Income. Other income increased $333,000 from 2012 to 2013 due to income from our new equity investment in GAF for the year ended December 31, 2013, compared to the year ended December 31, 2012.
Selling, General and Administrative. Selling, general and administrative expenses increased $21,003,000 from 2012 to 2013. This increase is primarily due to higher commission expense of $9,122,000 at Independence American due to higher premiums, higher profit commission expense of $2,170,000 at Independence American due to higher commissions for direct medical stop loss, higher expenses of $1,228,000 due to the formation of Specialty Benefits in May 2012, higher expenses at Risk Solutions of $2,063,000 primarily due to higher salary expense and travel expense related to an increase in sales, higher administration expense of $1,574,000 at Independence American due to higher pet insurance premiums written, higher expenses at HIO of $4,545,000 due to higher referral fees, and higher expenses of $357,000 due to the formation of IPAD in July 2013, offset by lower expenses at IPA Family of $515,000 primarily due to lower agent expenses.
Income Taxes. The provision for income taxes increased $5,764,000 to $1,874,000, an effective rate of 35.3%, for 2013, compared to a tax benefit of $3,890,000, an effective rate of -68.2%, for 2012. Net income for 2013 and 2012 includes a non-cash provision for federal income taxes of $1,775,000 and $1,868,000, respectively. The state tax effective rate decreased to 0.5% for 2013, compared to 1.4% for 2012. In 2012, the Company further reduced the valuation allowance relating to the deferred tax asset by $5,900,000, 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 $5,900,000 reduction in the valuation allowance relating to the deferred tax asset, the effective tax rate was 35.3% for 2012.
Selling, General and Administrative. Selling, general and administrative expenses increased $2,951,000 from 2011 to 2012. This increase is primarily due to higher expenses at HIO of $859,000 due to higher referral and management fees, higher expenses of $1,549,000 due to the formation of Specialty Benefits in May 2012, higher commission expense of $2,349,000 at Independence American due to higher assumed medical stop-loss and LTD premiums, offset by lower expenses at Risk Solutions of $302,000 primarily due to lower professional fees, lower expenses at IPA Family of $1,138,000 due to lower professional fees and lower agent expenses, and lower profit commission expense of $498,000 at Independence American primarily for the medical stop-loss business written.
The Company had $4.4 million and $4.6 million of cash and cash equivalents as of December 30, 2013 and December 31, 2012, respectively.
For the year ended December 31, 2013, operating activities provided the Company with $16.2 million of cash primarily due to an increase in premiums, whereas $13.6 million of cash was utilized by investing activities primarily due to the purchase of fixed maturities. Financing activities, which utilized $2.7 million for the period, includes a $0.6 million contingent liability payment, $1.2 million utilized by AMIC to acquire treasury shares, and $0.9 million utilized to pay dividends to noncontrolling interests.
The Company had receivables from reinsurers of $7,549,000 at December 31, 2013. 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, 2013.
The Company's policy benefits and claims by line of business are as follows (in thousands):
The $1,766,000 decrease in AMIC’s stockholders' equity is primarily due to the repurchase of common stock of $1,198,000 and an increase in net unrealized losses on investments of $3,981,000, offset by net income of $3,435,000. The increase in net unrealized losses on investments is due to a decline in the Company’s bond portfolio as a result of a rise in interest rates in 2013.
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, 2013. In 2013, the Company experienced a decrease in net unrealized gains of $3,981,000 which decreased stockholders' equity by $3,981,000 (reflecting net unrealized losses of $2,152,000 at December 31, 2013 compared to net unrealized gains of $1,829,000 at December 31, 2012). 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.
The Company performed its annual test at December 31, 2013 and determined that goodwill was not impaired. No impairment charge was required for 2013 as fair value exceeded carrying value by more than 20%. Any impairment write-down of goodwill would be charged to expense. See Note 2 of Notes to Consolidated Financial Statements.
In determining the fair value of the Company, we used an income approach, applying a discounted cash flow method which included a residual value. Based on historical experience, we made 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 Company.
Management uses a significant amount of judgment in estimating the fair value of the Company. The key assumptions underlying the fair value process are subject to uncertainty and change. The following represent some of the potential risks that could impact these assumptions and the related expected future cash flows: (i) increased competition; (ii) an adverse change in the insurance industry and overall business climate; (iii) changes in state and federal regulations; (iv) rating agency downgrades of our insurance companies; and (v) a sustained and significant decrease in our share price and market capitalization. At December 31, 2013, the Company’s market capitalization was less than its book value indicating a potential impairment of goodwill. As a result, the Company assessed the factors contributing to the performance of AMIC stock in 2013, and concluded that the market capitalization does not represent the fair value of the Company. The Company noted several factors that have led to a difference between the market capitalization and the fair value of the Company, including (i) the Company’s stock is thinly traded and a sale of even a small number of shares can have a large percentage impact on the price of the stock, (ii) IHC owns 90% of the outstanding shares, which has had a
Our individual major medical premiums will dissipate in 2014 as a result of having exited this line of business.
Further adapting to health care reform by continuing to proactively adjust our distribution strategies and mix of Fully Insured Health products to take advantage of changing market demands.
We intend to increase our sales of (and reinsurance from IHC’s sales of) short-term and fixed indemnity limited benefit and ancillary health products, such as dental, to offset the reduction in major medical premiums. We will also increase our DBL reinsurance premiums due to higher sales at IHC.
We make changes in the valuation allowance for our deferred tax asset from time to time as our earnings grow, which would positively impact our earnings and book value.
With respect to the IHC Treaties, the Company’s operating results are affected by the following factors: (i) the percentage of business ceded to Independence American pursuant to the IHC Treaties; (ii) the amount of gross premium written by Standard Security Life or Madison National Life that is ceded to the IHC Treaties; and (iii) the amount of gross premium produced by Risk Solutions and other distribution sources written by carriers other than Standard Security Life or Madison National Life that is ceded to Independence American. The profitability of the business ceded will also impact our operating results. Independence American assumes medical stop-loss, fully insured health, DBL and LTD premiums from IHC under the IHC Treaties.
Independence American reinsures 20% of Standard Security Life’s DBL product. Standard Security Life is not contractually obligated to continue to cede this business to Independence American after termination of the current treaty year. Independence American assumed 8% of certain of IHC’s LTD business. Standard Security Life and Madison National Life ceded approximately 12% of their fully insured health business to Independence American. Standard Security Life and Madison National Life are not contractually obligated to continue to cede this business to Independence American after termination of the current treaty years.
The gross medical stop-loss premiums earned by IHC increased by approximately 19%, and premiums earned by AMIC increased 17% in 2013 as a result of an increase in premiums produced by Risk Solutions. Risk Solutions anticipates increasing its production of medical stop-loss business in 2014. IHC has reported that it expects its fully insured and DBL premiums to increase in 2013. Therefore, Independence American anticipates reinsuring a higher amount of medical-stop loss and DBL premium ceded by IHC in 2014.
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.
Consolidated Balance Sheets as of December 31, 2013 and December 31, 2012
Consolidated Statements of Income for the years ended December 31, 2013, 2012
The management of American Independence Corp. ("AMIC") is responsible for establishing and maintaining adequate internal control over financial reporting. AMIC's internal control system was designed to provide reasonable assurance to the Company's management and Board of Directors regarding reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Independence Corp. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013 in conformity with U.S. generally accepted accounting principles.
required. In determining the fair value of the Company, the Company used an income approach, applying a discounted cash flow method which included a residual value. Based on historical experience, we made 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 Company. Any impairment write-down of goodwill would be charged to expense. No impairment charge was required in 2013 or 2012.
Securities purchased under agreements to resell ("resale agreements") and securities sold under agreements to repurchase ("repurchase agreements") are carried at the amounts at which the securities will be subsequently resold or repurchased as specified in the agreements.
(a) Securities which are held for trading purposes are carried at estimated fair value ("fair value"). Changes in fair value are credited or charged, as appropriate, to net realized investment gains in the Consolidated Statements of Income.
(iii) Gains or losses on sales of securities are determined on the basis of specific identification and are recorded in the Consolidated Statements of Income on the trade date.
(v) 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
Liabilities for policy benefits and claims on medical stop-loss coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. Reserves for medical stop-loss insurance are more volatile in nature than those for fully insured medical insurance. This is primarily due to the excess nature of medical stop-loss, with very high deductibles applying to specific claims on any individual claimant and in the aggregate for a given group. The level of these deductibles makes it more difficult to predict the amount and payment pattern of such claims. Furthermore, these excess claims are highly sensitive to changes in factors such as medical trend, provider contracts and medical treatment protocols, adding to the difficulty in predicting claim values and estimating reserves. Also, because medical stop-loss is in excess of an underlying benefit plan, there is an additional layer of claim reporting and processing that can affect claim payment patterns. Finally, changes in the distribution of business by effective month can affect reserve estimates due to the timing of claim occurrences and the time required to accumulate claims against the stop-loss deductible.
The two “primary” or “key” assumptions underlying the calculation of loss reserves for medical stop-loss business are (i) projected net loss ratio, and (ii) claim development patterns. The projected net loss ratio is set at expected levels consistent with the underlying assumptions (“Projected Net Loss Ratio”). Claim development patterns are set quarterly as reserve estimates
Liabilities for policy benefits and claims for fully insured medical business are established to provide for the liability for incurred but not paid claims. Reserves are calculated using standard actuarial methods and practices. Historical paid claim patterns are reviewed and estimated development factors are applied to immature incurred months to calculate these reserves. The primary assumption in the determination of fully insured reserves is that historical claim development patterns are representative of future claim development patterns. Factors which may affect this assumption include changes in claim payment processing times and procedures, changes in time delay in submission of claims and the incidence of unusually large claims. Liabilities for fully insured medical reserves and disability coverages are computed using completion factors and expected Net Loss Ratios derived from actual historical premium and claim data. The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are not material. The delay in submission of claims tends to be stable over time and not subject to significant volatility.
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 2013 and 2012, 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.
In July 2013, the Financial Accounting Standards Board (“FASB”) issued guidance that permits the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes and removes the restriction on using different benchmark rates for similar hedges. This guidance is effective prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In February 2013, the FASB issued guidance requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. For other amounts, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The adoption of this guidance, effective January 1, 2013, only affected the Company’s presentation of information pertaining to other comprehensive income (loss) and did not affect the Company’s consolidated financial statements.
In July 2013, the 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. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 31, 2013. The Company’s presentation of unrecognized tax benefits is consistent with this guidance and therefore the adoption of such guidance will not have an effect on the Company’s consolidated financial statements.
The Company manages and reports the business as a single segment in accordance with FASB guidance, which views certain qualitative and quantitative criteria for determining whether different lines of business should be aggregated for financial reporting purposes. FASB guidance requires the use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure or any other manner in which management disaggregates a company.
The Company is managed with a focus on its overall insurance and reinsurance capabilities as opposed to any one line of business. Our Chief Executive Officer, who is our chief decision maker, evaluates financial information for our business as a single segment in allocating resources and assessing performance. The integrated nature of our insurance lines of business with our Agencies is sufficiently commingled to permit their aggregation as a single reporting segment.
The Company performed its annual test at December 31, 2013 and determined that goodwill was not impaired.
to earnings relating to impairment of our goodwill, which could have a material adverse effect on our results.
The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of long-term investment securities are as follows (in thousands):
The following tables summarize, for all securities in an unrealized loss position at December 31, 2013 and December 31, 2012, 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):
The following table summarizes the Company’s net investment income for the years indicated (in thousands):
In January 2012, the Company transferred equity securities previously classified as available-for-sale into the trading category and, as a result, recognized $42,000 of gross gains and $22,000 of gross losses in net realized investment gains on the accompanying Consolidated Statements of Income. These gains and losses were previously included in accumulated other comprehensive income.
We recognize an other-than-temporary impairment loss in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any
non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income. For the years ended December 31, 2013, 2012 and 2011, other-than-temporary impairments recognized in earnings of $0, $189,000 and $89,000, respectively, represent credit losses on fixed maturities as a result of the expected cash flows of certain securities being less than the securities’ amortized cost.
Cumulative credit losses for other-than-temporary impairments recorded on securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income were as follows (in thousands):
Available-for-sale securities included in Level 1 are equity securities with quoted market prices. Level 2 is primarily comprised of our portfolio of corporate fixed income securities, government agency mortgage-backed securities, government sponsored enterprises, certain CMO securities, municipals and certain preferred stocks that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by Alt-A mortgages. For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.
The following tables present our financial assets measured at fair value on a recurring basis at December 31, 2013 and 2012, respectively (in thousands):
On December 31, 2012, the Company invested $1,250,000 in exchange for a 40% interest in Global Accident Facilities, LLC (“GAF”). GAF acquired Accident Insurance Services, Morgan Financial, Caprock Claim Management and Medical Pricing Strategies, jointly referred to as AIS. AIS produces and administers occupational accident and related coverages sold to Texas non-subscribers to workers compensation. At December 31, 2013 and December 31, 2012, the Company had an equity investment in GAF with a carrying value of $1,720,000 and $1,250,000, respectively. For the year ended 2013, the Company recorded $470,000 for its share of income from its investment in other income in the Consolidated Statements of Income.
The approximate minimum annual rental payments under operating leases that have remaining non-cancelable lease terms in excess of one year at December 31, 2013 are as follows (in thousands):
The Company's net rent expense for years 2013, 2012, and 2011 were $403,000, $276,000, and $222,000, 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, 2013, stock options for 222,285 shares of common stock were outstanding, stock options for 207,840 shares of common stock were vested, and 6,503,887 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.
Total share-based compensation expense was $42,000, $33,000 and $43,000 for the twelve months ended December 31, 2013, 2012 and 2011, respectively. Related tax benefits of $15,000, $11,000 and $15,000 were recognized for the twelve months ended December 31, 2013, 2012 and 2011, respectively.
Compensation expense was $42,000, $33,000, and $36,000 for the twelve months ended December 31, 2013, 2012, and 2011, respectively. As of December 31, 2013, there was approximately $59,000 of total unrecognized compensation expense related to non-vested options which will be recognized over the remaining requisite service periods.
Independence American derives 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 were entered into in 2002 and terminate on December 31, 2014, unless terminated sooner by Independence American. 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 the twelve months ended December 31, 2013 and 2012, Standard Security Life and Madison National Life ceded an average of approximately 26% and 24%, respectively, of their medical stop-loss business to Independence American. Commencing in July 2004, Independence American began reinsuring 20% of Standard Security Life’s DBL business. Independence American assumed 8% of certain of IHC’s international health and LTD business. Standard Security Life and Madison National Life ceded approximately 12% and 8% of the majority of its fully insured health business to Independence American in 2013 and 2012, respectively.
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 Condensed Consolidated Balance Sheets and Condensed 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.
IHC provides the Company with pro rata quota share reinsurance on business written by Independence American. Independence American cedes a certain percentage of its direct stop-
The Company and its subsidiaries incurred expense of $921,000 and $1,088,000 for the twelve months ended December 31, 2013 and 2012, 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.
The tax effect of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2013 and 2012 are as follows (in thousands):
The valuation allowance at December 31, 2013 and 2012 was primarily related to net operating loss carryforwards that, in the judgment of management, were not considered realizable. During the year ended December 31, 2013 and 2012 the Company decreased its valuation allowance by $1,661,000 and $6,093,000, respectively. The valuation allowance decrease in the year ended December 31, 2013 included a $3,054,000 adjustment to deferred tax assets for expired state NOL carryforwards, offset by an increase of $1,393,000 due to deferred tax on unrealized losses allocated to equity. The valuation allowance decrease in the year ended December 31, 2012 included $5,900,000 for the projected utilization of federal net operating losses which was allocated to operations and a decrease of $193,000 due to deferred tax on unrealized gains allocated to equity.
Changes in the liability for policy benefits and claims for the years ended December 31, 2013 and 2012 are summarized below (in thousands).
Independence American reinsures a portion of its direct business in order to limit the assumption of disproportionate risks. Amounts not retained are ceded to other companies on an automatic basis. Independence American is contingently liable with respect to reinsurance in the unlikely event that the assuming reinsurers are unable to meet their obligations. All of Independence American’s insurance contracts are of short-duration. The ceding of reinsurance does not discharge the primary liability of the original insurer to the insured. At December 31, 2013, Independence American ceded to highly rated reinsurers.
All premiums included in Assumed From Other Companies for 2013, 2012 and 2011 were assumed from subsidiaries of IHC. Included in Ceded To Other Companies for 2013, 2012 and 2011 are premiums of $108,000, $1,835,000, and $1,250,000, respectively, which were ceded to subsidiaries of IHC.
Independence American is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Office of the Insurance Commissioner of the State of Delaware. Statutory accounting practices differ from U.S. GAAP in several respects causing differences in reported net income and stockholder’s equity. Independence American has no permitted accounting practices, which encompass all accounting practices not so prescribed that have been specifically allowed by the Office of the Insurance Commissioner of the State of Delaware.
The components of other comprehensive income include the after-tax net unrealized gains and losses on investment securities available for sale including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired and the non-credit related component of other-than-temporary impairments of fixed maturities and equity securities.
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 stock, inclusive of prior authorizations, under the 2010 plan. The Company has repurchased 199,784 and 263,102 shares in 2013 and 2011, respectively, which the Company classified as treasury shares. There were no share repurchases in 2012. At December 31, 2013, there were 500,000 shares still authorized to be repurchased under the plan authorized by the Board of Directors.