INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

                                             

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________


FORM 10-Q


[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2015.


[   ]

Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________  


Commission File Number: 001-32244


INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware

 

58-1407235

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)


96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT                      06902

                                  (Address of principal executive offices)                                              (Zip Code)


Registrant's telephone number, including area code: (203) 358-8000


NOT APPLICABLE

Former name, former address and former fiscal year, if changed since last report.


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   [X]   No [  ]


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   [X]   No [  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer [    ]

Accelerated Filer   [ X  ]

Non-Accelerated Filer   [  ]

Smaller Reporting Company   [     ]


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   [  ]   No   [X]


Class

Outstanding at May 1, 2015

Common stock, $ 1.00  par value

17,336,816 Shares






INDEPENDENCE HOLDING COMPANY


INDEX


PART I – FINANCIAL INFORMATION

PAGE

 

NO.

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets

4

 

 

 

Condensed Consolidated Statements of Income

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

 

 

Condensed Consolidated Statement of Changes in Equity

7

 

 

 

Condensed Consolidated Statements of Cash Flows

8

 

 

 

Notes to Condensed Consolidated Financial Statements

9

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition

 

 

and Results of Operations

25

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4. Controls and Procedures

35

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

36

 

 

 

 

Item 1A. Risk Factors

36

 

 

 

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

 

 

Item 3.    Defaults Upon Senior Securities

36

 

 

 

 

Item 4.    Mine Safety Disclosures

36

 

 

 

 

Item 5.    Other Information

36

 

 

 

Item 6.    Exhibits

37

 

 

 

Signatures

39

 

 

 

 



Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.



2



Forward-Looking Statements


This report on Form 10Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.


Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance.  We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors, of IHC’s annual report on Form 10-K as filed with Securities and Exchange Commission.


Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.




3


PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

    


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

 

 

 

March 31, 2015

 

 

December 31, 2014

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

Short-term investments

 

$

50

 

$

50 

 

Securities purchased under agreements to resell

 

 

50,937

 

 

16,790 

 

Trading securities

 

 

9,520

 

 

11,095 

 

Fixed maturities, available-for-sale

 

 

564,144

 

 

583,880 

 

Equity securities, available-for-sale

 

 

7,350

 

 

13,895 

 

Other investments

 

 

25,484

 

 

25,251 

 

Total investments

 

 

657,485

 

 

650,961 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

20,595

 

 

25,083 

 

Deferred acquisition costs

 

 

31,143

 

 

30,806 

 

Due and unpaid premiums

 

 

76,811

 

 

62,628 

 

Due from reinsurers

 

 

273,712

 

 

278,242 

 

Premium and claim funds

 

 

32,929

 

 

32,553 

 

Goodwill

 

 

50,318

 

 

50,318 

 

Other assets

 

 

62,739

 

 

57,126 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,205,732

 

$

1,187,717 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

 

Policy benefits and claims

 

$

245,047

 

$

236,803 

 

Future policy benefits

 

 

275,803

 

 

277,041 

 

Funds on deposit

 

 

181,119

 

 

186,782 

 

Unearned premiums

 

 

11,042

 

 

9,455 

 

Other policyholders' funds

 

 

18,326

 

 

18,802 

 

Due to reinsurers

 

 

47,823

 

 

47,945 

 

Accounts payable, accruals and other liabilities

 

 

79,052

 

 

67,641 

 

Debt

 

 

4,000

 

 

4,000 

 

Junior subordinated debt securities

 

 

38,146

 

 

38,146 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

900,358

 

 

886,615 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

IHC STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

Preferred stock (none issued)

 

 

 

 

 

Common stock $1.00 par value, 23,000,000 shares authorized;

 

 

 

 

 

 

 

18,545,758 and 18,531,158 shares issued; 17,336,816 and

 

 

 

 

 

 

 

17,371,040 shares outstanding

 

 

18,546 

 

 

18,531 

 

Paid-in capital

 

 

127,113 

 

 

127,098 

 

Accumulated other comprehensive income

 

 

901 

 

 

22 

 

Treasury stock, at cost; 1,208,942 and 1,160,118 shares

 

 

(12,738)

 

 

(12,141)

 

Retained earnings

 

 

162,865 

 

 

157,667 

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

296,687 

 

 

291,177 

NONCONTROLLING INTERESTS IN SUBSIDIARIES

 

 

8,687 

 

 

9,925 

 

 

 

 

 

 

 

 

 

TOTAL EQUITY

 


305,374 

 

 

301,102 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,205,732 

 

$

1,187,717 



See the accompanying Notes to Condensed Consolidated Financial Statements.



4



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

REVENUES:

 

 

 

 

 

Premiums earned

$

122,114 

$

123,270 

 

Net investment income

 

5,441 

 

5,801 

 

Fee income

 

3,716 

 

9,339 

 

Other income

 

994 

 

1,111 

 

Net realized investment gains

 

2,000 

 

1,551 

 

 

 

 

 

 

 

134,265 

 

141,072 

EXPENSES:

 

 

 

 

 

Insurance benefits, claims and reserves

 

79,620 

 

85,309 

 

Selling, general and administrative expenses

 

44,149 

 

48,135 

 

Amortization of deferred acquisitions costs

 

1,464 

 

1,282 

 

Interest expense on debt

 

432 

 

481 

 

 

 

 

 

 

 

125,665 

 

135,207 

 

 

 

 

 

 

 

Income before income taxes

 

8,600 

 

5,865 

 

Income taxes

 

3,269 

 

1,860 

 

 

 

 

 

 

 

Net income

 

5,331 

 

4,005 

 

Less: Income from noncontrolling interests in subsidiaries

 

(112)

 

(304)

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

5,219 

$

3,701 

 

 

 

 

 

Basic income per common share

$

.30 

$

.21 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

17,364 

 

17, 623

 

 

 

 

 

Diluted income per common share

$

.30 

$

.21 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

17,531 

 

17,763 












See the accompanying Notes to Condensed Consolidated Financial Statements.



5




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

March  31,

 

 

2015

 

2014

 

 

 

 

 

Net income

$

5,331 

$

4,005

Other comprehensive income:

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Unrealized gains on available-for-sale securities, pre-tax

 

1,305 

 

8,017

 

Tax expense on unrealized gains on available-for-sale securities

 

397 

 

2,378

 

Unrealized gains on available-for-sale securities, net of taxes

 

908 

 

5,639

 

 

 

 

 

 

 

Cash flow hedge:

 

 

 

 

 

Unrealized gains on cash flow hedge, pre-tax

 

15 

 

17 

 

Tax expense on unrealized gains on cash flow hedge

 

 

 

Unrealized gains on cash flow hedge, net of taxes

 

 

10 

 

 

 

 

 

 

 

Other comprehensive income, net of tax

 

917 

 

5,649

 

 

 

 

 

 

    COMPREHENSIVE INCOME, NET OF TAX

 

6,248 

 

9,654 

 

 

 

 

 

Comprehensive income, net of tax, attributable to noncontrolling interests:

 

 

 

 

Income from noncontrolling interests in subsidiaries

 

(112)

 

(304)

Other comprehensive income, net of tax, attributable to noncontrolling interests:

 

 

 

 

 

Unrealized gains on available-for-sale securities, net of tax

 

(43)

 

(131)

 

Other comprehensive income, net of tax, attributable to

 

 

 

 

 

    noncontrolling interests

 

(43)

 

(131)

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

    ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

(155)

 

(435)

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

    ATTRIBUTABLE TO IHC

$

6,093 

$

9,219 















See the accompanying Notes to Condensed Consolidated Financial Statements.




6



INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

CONTROLLING

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

INTERESTS IN

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME

 

AT COST

 

EARNINGS

 

EQUITY

 

SUBSIDIARIES

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2014

$

18,531

$

127,098 

$

22

$

(12,141)

$

157,667

$

291,177 

$

9,925 

$

301,102 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

5,219

 

5,219 

 

112 

 

5,331 

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income, net of tax

 

 

 

 

 

874

 

 

 

 

 

874 

 

43 

 

917 

Repurchases of common stock

 

 

 

 

 

 

 

(597)

 

 

 

(597)

 

 

(597)

Purchases of noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

(199)

 

5

 

 

 

 

 

(194)

 

(1,415)

 

(1,609)

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

expenses and related

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

tax benefits

 

15

 

205 

 

 

 

 

 

 

 

220 

 

 

220 

Other capital transactions

 

 

 

 

 

 

 

 

(21)

 

(12)

 

22 

 

10 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2015

$

18,546

$

127,113 

$

901

$

(12,738)

$

162,865

$

296,687 

$

8,687 

$

305,374 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 













See the accompanying Notes to Condensed Consolidated Financial Statements.



7




INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 (In thousands)

 

 

 

Three Months Ended March 31,

 

 

2015

 

 

2014

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

$

5,331 

 

$

4,005 

 

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

 

 operating  activities:

 

 

 

 

 

 

Amortization of deferred acquisition costs

 

1,464 

 

 

1,282 

 

Net realized investment gains

 

(2,000)

 

 

(1,551)

 

Equity income from equity method investments

 

(365)

 

 

(433)

 

Depreciation and amortization

 

732 

 

 

1,005 

 

Share-based compensation expenses

 

58 

 

 

16 

 

Deferred tax  expense

 

3,639 

 

 

824 

 

Other

 

1,699 

 

 

1,275 

  Changes in assets and liabilities:

 

 

 

 

 

 

Net (purchases) sales of trading securities

 

1,291 

 

 

(2,889)

 

Change in insurance liabilities

 

2,935 

 

 

2,552 

 

Additions to deferred acquisition costs

 

(1,954)

 

 

(1,383)

 

Change in  amounts due from reinsurers

 

4,531 

 

 

227 

 

Change in premium and claim funds

 

(376)

 

 

(909)

 

Change in current income tax liability

 

(789)

 

 

522 

 

Change in due and unpaid premiums

 

(14,183)

 

 

(2,837)

 

Change in other assets

 

337 

 

 

(1,777)

 

Change in other liabilities

 

4,482 

 

 

4,125 

 

 

 

 

 

 

 

 

Net change in cash from operating activities

 

6,832 

 

 

4,054 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

 

Net purchases of securities under resale and repurchase agreements

 

(34,147)

 

 

(12,377)

 

Sales of equity securities

 

3,902 

 

 

250 

 

Purchases of equity securities

 

 

 

(250)

 

Sales of fixed maturities

 

92,089 

 

 

83,746 

 

Maturities and other repayments of fixed maturities

 

12,067 

 

 

17,344 

 

Purchases of fixed maturities

 

(81,963)

 

 

(94,159)

 

Other investing activities

 

10 

 

 

3,018 

 

 

 

 

 

 

 

Net change in cash from investing activities

 

(8,042)

 

 

(2,428)

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 

 

 

 

 

Repurchases of common stock

 

(597)

 

 

(1,120)

 

Cash paid in acquisitions of noncontrolling interests

 

(1,609)

 

 

 

Withdrawals of investment-type insurance contracts

 

(607)

 

 

(816)

 

Dividends paid

 

(609)

 

 

(620)

 

Proceeds from exercise of stock options

 

133 

 

 

 

Other financing activities

 

11 

 

 

(218)

 

 

 

 

 

 

 

Net change in cash from financing activities

 

(3,278)

 

 

(2,774)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(4,488)

 

 

(1,148)

Cash and cash equivalents, beginning of year

 

25,083 

 

 

24,229 

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

20,595 

 

$

23,081 







See the accompanying Notes to Condensed Consolidated Financial Statements.



8


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)


Note 1.  

Organization, Consolidation, Basis of Presentation and Accounting Policies


(A)

Business and Organization


Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"),  Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Risk Solutions, LLC, IHC Health Solutions, Inc., IHC Specialty Benefits Inc. and IHC Carrier Solutions, Inc.  IHC also owns a significant equity interest in a managing general underwriter (“MGU”) that writes medical stop-loss. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”.  


Geneve Corporation, a diversified financial holding company, and its affiliated entities, held 52.8% of IHC's outstanding common stock at March 31, 2015.

 

(B)

Consolidation


American Independence Corp.


American Independence Corp. (“AMIC”) is an insurance holding company engaged in the insurance and reinsurance business. During the first quarter of 2015, IHC purchased shares of AMIC common stock thereby increasing its ownership interest in AMIC to approximately 92% as of March 31, 2015. At December 31, 2014, the Company owned approximately 90% of the outstanding common stock of AMIC.


Effects of Ownership Changes in Subsidiaries


The following table summarizes the effects of changes in the Company’s ownership interests in its subsidiaries on IHC’s equity for the three months ended March 31, 2015 (in thousands):


Changes in IHC’s paid-in capital:

 

 

 

    Purchases of AMIC shares

 

$

(199)

 

 

 

 

         Net transfers from noncontrolling interests

 

$

(199)


 (C)

Basis of Presentation


The Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant 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



9


reporting period. Actual results could differ from those estimates. IHC’s annual report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying Condensed Consolidated Financial Statements.


In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be anticipated for the entire year.



 (D)

Recent Accounting Pronouncements


Recently Adopted Accounting Standards


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. The adoption of this guidance did not have any effect on the Company’s consolidated financial statements.


Recently Issued Accounting Standards Not Yet Adopted


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 May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Early application is prohibited. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.



10



Note 2.

Income Per Common Share


Diluted earnings per share was computed using the treasury stock method and includes incremental common shares, primarily from the dilutive effect of share-based payment awards, amounting to 167,000 and 140,000 shares for the three months ended March 31, 2015 and 2014.


Note  3.

Investment Securities


The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows for the periods indicated (in thousands):


 

 

March 31, 2015

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

252,958

$

1,971

$

(3,384)

$

251,545

CMOs - residential (1)

 

5,567

 

120

 

 

5,687

CMOs - commercial

 

975

 

41

 

 

1,016

U.S. Government obligations

 

20,627

 

321

 

 

20,948

Agency MBS - residential (2)

 

61

 

3

 

 

64

GSEs (3)

 

14,246

 

81

 

(60)

 

14,267

States and political subdivisions

 

227,497

 

3,666

 

(1,600)

 

229,563

Foreign government obligations

 

36,651

 

279

 

(37)

 

36,893

Redeemable preferred stocks

 

4,036

 

125

 

 

4,161

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

562,618

$

6,607

$

(5,081)

$

564,144


EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

3,255

$

-

$

(94)

$

3,161

Nonredeemable preferred stocks

 

4,004

 

185

 

 

4,189

 

 

 

 

 

 

 

 

 

Total equity securities

$

7,259

$

185

$

(94)

$

7,350




11



 

 

December 31, 2014

 

 

 

 

GROSS

 

GROSS

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR

 

 

COST

 

GAINS

 

LOSSES

 

VALUE

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

264,162

$

1,076

$

(3,314)

$

261,924

CMOs - residential (1)

 

5,073

 

55

 

(22)

 

5,106

CMOs - commercial

 

975

 

-

 

(22)

 

953

U.S. Government obligations

 

22,766

 

126

 

 

22,892

Agency MBS - residential (2)

 

65

 

4

 

 

69

GSEs (3)

 

14,706

 

36

 

(86)

 

14,656

States and political subdivisions

 

238,514

 

3,253

 

(2,386)

 

239,381

Foreign government obligations

 

34,863

 

136

 

(299)

 

34,700

Redeemable preferred stocks

 

4,036

 

163

 

 

4,199

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

585,160

$

4,849

$

(6,129)

$

583,880


EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

8,452

$

1,452

$

(147)

$

9,757

Nonredeemable preferred stocks

 

4,004

 

134

 

 

4,138

 

 

 

 

 

 

 

 

 

Total equity securities

$

12,456

$

1,586

$

(147)

$

13,895


(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government.


The amortized cost and fair value of fixed maturities available-for-sale at March 31, 2015, by contractual maturity, are shown below (in thousands). 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.


 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

18,337

 

$

18,293

Due after one year through five years

 

 

130,742

 

 

131,020

Due after five years through ten years

 

 

174,298

 

 

176,095

Due after ten years

 

 

219,399

 

 

218,751

CMOs and MBSs

 

 

19,842

 

 

19,985

 

 

 

 

 

 

 

 

 

$

562,618

 

$

564,144




12


The following tables summarize, for all available-for-sale securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):


 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

85,635

 

$

2,326

 

$

48,574

 

$

1,058

 

$

134,209

$

3,384

GSEs

 

-

 

 

-

 

 

5,200

 

 

60

 

 

5,200

 

60

States and political subdivisions

 

35,045

 

 

315

 

 

56,185

 

 

1,285

 

 

91,230

 

1,600

Foreign government obligations

 

4,684

 

 

3

 

 

1,374

 

 

34

 

 

6,058

 

37

   Total fixed maturities

 

125,364

 

 

2,644

 

 

111,333

 

 

2,437

 

 

236,697

 

5,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

3,161

 

 

94

 

 

-

 

 

-

 

 

3,161

 

94

   Total equity securities

 

3,161

 

 

94

 

 

-

 

 

-

 

 

3,161

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

128,525

 

$

2,738

 

$

111,333

 

$

2,437

 

$

239,858

$

5,175

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

54

 

 

 

 

 

34

 

 

 

 

 

88

 

 


 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

77,868

 

$

1,473

 

$

69,498

 

$

1,841

 

$

147,366

$

3,314

CMO’s  - residential

 

2,062

 

 

16

 

 

1,562

 

 

6

 

 

3,624

 

22

CMOs - commercial

 

-

 

 

-

 

 

953

 

 

22

 

 

953

 

22

GSEs

 

-

 

 

-

 

 

9,581

 

 

86

 

 

9,581

 

86

States and political subdivisions

 

58,819

 

 

744

 

 

67,318

 

 

1,642

 

 

126,137

 

2,386

Foreign government obligations

 

21,148

 

 

171

 

 

12,229

 

 

128

 

 

33,377

 

299

   Total fixed maturities

 

159,897

 

 

2,404

 

 

161,141

 

 

3,725

 

 

321,038

 

6,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

2,007

 

 

136

 

 

348

 

 

11

 

 

2,355

 

147

   Total equity securities

 

2,007

 

 

136

 

 

348

 

 

11

 

 

2,355

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       securities

$

161,904

 

$

2,540

 

$

161,489

 

$

3,736

 

$

323,393

$

6,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   unrealized loss position

 

70

 

 

 

 

 

46

 

 

 

 

 

116

 

 


Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2015 and December 31, 2014 relate to investment grade securities and are 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, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2015.




13


Net realized investment gains are as follows for periods indicated (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

   Fixed maturities

$

1,300 

$

1,477

   Common stocks

 

1,465 

 

-

      Total sales of available-for-sale securities

 

2,765 

 

1,477

 

 

 

 

 

Trading securities

 

(507)

 

5

      Total realized gains

 

2,258 

 

1,482

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

   Change in unrealized gains (losses) on trading securities

 

(251)

 

69

      Total unrealized gains (losses)  on trading securities

 

(251)

 

69

 

 

 

 

 

Gains (losses) on other investments

 

(7)

 

-

 

 

 

 

 

Net realized investment gains

$

2,000 

$

1,551


For the three months ended March 31, 2015 and 2014, proceeds from sales of available-for-sale securities were $106,415,000 and $97,550,000, respectively, and the company realized gross gains of $3,114,000 and $2,605,000, respectively, and gross losses of $182,000 and $419,000, respectively, on those sales.


Other-Than-Temporary Impairment Evaluations


We recognize other-than-temporary impairment losses 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 (loss). See Note 1G(iv) to the Consolidated Financial Statements in the 2014 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. The Company did not recognize any other-than-temporary impairments on available-for-sale securities in 2015 or 2014.


Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

 

 

 

 

 

Balance at beginning of year

$

473

$

473 

Additional credit losses for which an other-than-temporary

 

 

 

 

    loss was previously recognized

 

-

 

Securities sold

 

-

 

 

 

 

 

 

Balance at end of period

$

473

$

473 




14


The after-tax portion of other-than-temporary impairments included in accumulated other comprehensive income (loss) at both March 31, 2015 and December 31, 2014 consists of $335,000 related to CMO securities.


Note 4.

Cash Flow Hedge


In connection with its outstanding amortizing term loan, a subsidiary of IHC entered into an interest rate swap on July 1, 2011 with the commercial bank lender, for a notional amount equal to the debt principal amount ($4,000,000 at both March 31, 2015 and December 31, 2014), under which the Company receives a variable rate equal to the rate on the debt and pays a fixed rate (1.60%) in order to manage the risk in overall changes in cash flows attributable to forecasted interest payments. As a result of the interest rate swap, interest payments on this debt are fixed at 4.95%. There was no hedge ineffectiveness on this interest rate swap which was accounted for as a cash flow hedge. At March 31, 2015 and December 31, 2014, the fair value of interest rate swap was $41,000 and $83,000, respectively, which is included in other liabilities on the accompanying Condensed Consolidated Balance Sheets. See Note 5 for further discussion on the valuation techniques utilized to determine the fair value of the interest rate swap.


Note 5.

Fair Value Disclosures


For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:


Level 1 - Quoted prices for identical instruments in active markets.


Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


Level 3 - Instruments where significant value drivers are unobservable.


The following section describes the valuation methodologies we use to measure different assets at fair value.

  

Investments in fixed maturities and equity securities:

  

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by commercial mortgages and municipal tax credit strips.  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.


Trading securities:


Trading securities included in Level 1 are equity securities with quoted market prices.



15



Interest rate swap:

  

The financial liability included in Level 2 consists of an interest rate swap on IHC debt.  It is valued using market observable inputs including market price, interest rate, and volatility within a Black Scholes model.


The following tables present our financial assets and liabilities measured at fair value on a recurring basis for the periods indicated (in thousands):


 

 

March 31, 2015

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

   Corporate securities

$

-

 

$

251,545

$

-

$

251,545

   CMOs - residential

 

-

 

 

5,687

 

-

 

5,687

   CMOs - commercial

 

-

 

 

-

 

1,016

 

1,016

   US Government obligations

 

-

 

 

20,948

 

-

 

20,948

   Agency MBS - residential

 

-

 

 

64

 

-

 

64

   GSEs

 

-

 

 

14,267

 

-

 

14,267

   States and political subdivisions

 

-

 

 

227,282

 

2,281

 

229,563

   Foreign government obligations

 

-

 

 

36,893

 

-

 

36,893

   Redeemable preferred stocks

 

4,161

 

 

-

 

-

 

4,161

      Total fixed maturities

 

4,161

 

 

556,686

 

3,297

 

564,144

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

   Common stocks

 

3,161

 

 

-

 

-

 

3,161

   Nonredeemable preferred stocks

 

4,189

 

 

-

 

-

 

4,189

      Total equity securities

 

7,350

 

 

-

 

-

 

7,350

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

9,520

 

 

-

 

-

 

9,520

       Total trading securities

 

9,520

 

 

-

 

-

 

9,520

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

21,031

 

$

556,686

$

3,297

$

581,014

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

   Interest rate swap

$

-

 

$

41

$

-

$

41




16



 

 

December 31, 2014

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

   Corporate securities

$

-

 

$

261,924

$

-

$

261,924

   CMOs – residential

 

-

 

 

5,106

 

-

 

5,106

   CMOs – commercial

 

-

 

 

-

 

953

 

953

   US Government obligations

 

-

 

 

22,892

 

-

 

22,892

   Agency MBS - residential

 

-

 

 

69

 

-

 

69

   GSEs

 

-

 

 

14,656

 

-

 

14,656

   States and political subdivisions

 

-

 

 

237,067

 

2,314

 

239,381

   Foreign government

 

-

 

 

34,700

 

-

 

34,700

   Redeemable preferred stocks

 

4,199

 

 

-

 

-

 

4,199

      Total fixed maturities

 

4,199

 

 

576,414

 

3,267

 

583,880

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

   Common stocks

 

9,757

 

 

-

 

-

 

9,757

   Nonredeemable preferred stocks

 

4,138

 

 

-

 

-

 

4,138

      Total equity securities

 

13,895

 

 

-

 

-

 

13,895

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

11,095

 

 

-

 

-

 

11,095

       Total trading securities

 

11,095

 

 

-

 

-

 

11,095

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

29,189

 

$

576,414

$

3,267

$

608,870

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

   Interest rate swap

$

-

 

$

83

$

-

$

83


It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow. The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2015 or 2014. The following table presents the changes in fair value of our Level 3 financial instruments for the periods indicated (in thousands):


 

 

Three Months Ended March 31, 2015

 

 

 

 

States and

 

 

 

 

CMOs

 

Political

 

 

 

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

Beginning balance

$

953

$

2,314 

$

3,267 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

    Net unrealized gains (losses)

 

63

 

(13)

 

50 

 

 

 

 

 

 

 

Repayments and amortization of fixed maturities

 

-

 

(20)

 

(20)

 

 

 

 

 

 

 

Balance at end of period

$

1,016

$

2,281 

$

3,297 




17



 

 

Three Months Ended March 31, 2014

 

 

 

 

States and

 

 

 

 

CMOs

 

Political

 

 

 

 

Commercial

 

Subdivisions

 

Total

 

 

 

 

 

 

 

Beginning balance

$

593

$

2,441 

$

3,034 

 

 

 

 

 

 

 

Gains (losses) included in other comprehensive income (loss):

 

 

 

 

 

 

    Net unrealized gains (losses)

 

276

 

(16)

 

260 

 

 

 

 

 

 

 

Repayments and amortization of fixed maturities

 

-

 

(15)

 

(15)

 

 

 

 

 

 

 

Balance at end of period

$

869

$

2,410 

$

3,279 


The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, for the periods indicated, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):

 

 

 

March 31, 2015

 

December 31, 2014

 

 

Level 2

 

 

 

 

Level 2

 

 

 

 

 

Fair

 

 

Carrying

 

Fair

 

 

Carrying

 

 

Value

 

 

Value

 

Value

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

  Policy loans

$

13,192

 

$

10,535

$

13,356

 

$

10,667

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

181,539

 

$

181,119

$

187,213

 

$

186,782

  Debt and junior subordinated

 

 

 

 

 

 

 

 

 

 

     debt securities

$

42,146

 

$

42,146

$

42,146

 

$

42,146


The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:


(A)

Policy Loans


The fair value of policy loans included in Level 2 of the fair value hierarchy is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.


(B)

Funds on Deposit


The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.


(C)

Debt


The fair value of debt with variable interest rates approximates its carrying amount and is included in Level 2 of the fair value hierarchy.




18


Note 6.

Goodwill and Other Intangible Assets


The carrying amount of goodwill was $50,318,000 at both March 31, 2015 and December 31, 2014.


The Company has net other intangible assets of $11,730,000 and $12,135,000 at March 31, 2015 and December 31, 2014, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization. The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):


 

 

March 31, 2015

 

December 31, 2014

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

 

 

 

 

 

Finite-lived Intangible Assets:

 

 

 

 

 

 

 

 

   Agent and broker relationships

$

22,725

$

18,972

$

22,725

$

18,567

      Total finite-lived

 

22,725

$

18,972

$

22,725

$

18,567

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

 

 

 

2015

 

2014

Indefinite-lived Intangible Assets:

 

 

 

 

 

 

 

 

    Insurance licenses

 

 

 

 

$

7,977

$

7,977

      Total indefinite-lived

 

 

 

 

$

7,977

$

7,977


Amortization expense was $404,000 and $679,000 for the three months ended March 31, 2015 and 2014, respectively.


Note 7.

 

Income Taxes


The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed based on the Company's actual results, which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group.


At March 31, 2015, AMIC had net operating loss carryforwards of approximately $263,184,000 for federal income tax purposes, expiring in varying amounts through the year 2028 with a significant portion expiring in 2020. The net deferred tax asset relative to AMIC included in other assets on IHC’s Condensed Consolidated Balance Sheets was $10,864,000 and $11,517,000 at March 31, 2015 and December 31, 2014, respectively.


Note 8.

Accumulated Other Comprehensive Income (Loss)


The components of other comprehensive income (loss) include (i) 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 (ii) the after-tax unrealized gains and losses on a cash flow hedge.



19


Changes in the balances for each component of accumulated other comprehensive income, shown net of taxes, for the periods indicated were as follows (in thousands):


 

 

Three Months Ended March 31, 2015

 

 

Unrealized

 

 

 

 

 

 

 

 

Gains (Losses) on

 

 

 

 

 

 

 

 

Available-for Sale

 

 

Cash Flow

 

 

 

 

 

Securities

 

 

Hedge

 

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

72 

 

$

(50)

 

$

22 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) before reclassifications

 

2,685 

 

 

 

 

2,694 

Amounts reclassified from accumulated OCI

 

(1,777)

 

 

 

 

(1,777)

   Net other comprehensive income

 

908 

 

 

 

 

917 

 

 

 

 

 

 

 

 

 

Less: Other comprehensive income attributable

 

 

 

 

 

 

 

 

    to noncontrolling interests

 

(43)

 

 

 

 

(43)

Acquired from noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

942 

 

$

(41)

 

$

901 


 

 

Three Months Ended March 31, 2014

 

 

Unrealized

 

 

 

 

 

 

 

 

Gains (Losses) on

 

 

 

 

 

 

 

 

Available-for Sale

 

 

Cash Flow

 

 

 

 

 

Securities

 

 

Hedge

 

 

Total

 

 

 

 

 

 

 

 

 

Beginning balance

$

(10,350)

 

$

(122)

 

$

(10,472) 

 

 

 

 

 

 

 

 

 

Other comprehensive income before reclassifications

 

6,618 

 

 

10 

 

 

6,628 

Amounts reclassified from accumulated OCI

 

(979)

 

 

 

 

(979)

   Net other comprehensive income

 

5,639 

 

 

10 

 

 

5,649 

 

 

 

 

 

 

 

 

 

Less: Other comprehensive income attributable

 

 

 

 

 

 

 

 

    to noncontrolling interests

 

(131)

 

 

 

 

(131)

 

 

 

 

 

 

 

 

 

Ending balance

$

(4,842)

 

$

(112)

 

$

(4,954)


Presented below are the amounts reclassified out of accumulated other comprehensive income (loss) and recognized in earnings for each of the periods indicated (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities

 

 

 

 

   reclassified during the period to the following income

 

 

 

 

   statement line items:

 

 

 

 

      Net realized investment gains

$

2,765

$

1,477

 

 

 

 

 

      Income before income tax

 

2,765

 

1,477

      Tax effect

 

988

 

498

 

 

 

 

 

      Net income

$

1,777

$

979



20


Note 9.

Share-Based Compensation


IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans.


A)  IHC Share-Based Compensation Plans


Under the terms of IHC’s stock-based compensation plans, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms are generallyfive years; and vesting periods are generally three years. The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In addition to stock options, the Company has also granted restricted stock units, share appreciation rights (“SARs”) and share-based performance awards under the plans. Restricted share units are valued at the quoted market price of the shares at the date of grant and have athree year vesting period. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and havethree year vesting periods. The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement.



At March 31, 2015, there were 377,286 shares available for future stock-based compensation grants under IHC’s stock incentive plans. The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income, applicable to the IHC plans, by award type for each of the periods indicated (in thousands):


 

 

Three Months Ended

 

 

March 31,

 

 

2015

 

2014

IHC’s Share-based Compensation Plan:

 

 

 

 

Stock options

$

55 

$

66 

Restricted stock units

 

21 

 

19 

SARs

 

(29)

 

(81)

 

 

 

 

 

Share-based compensation expense, pre-tax

 

47 

 

Tax benefits

 

19 

 

 

 

 

 

 

Share-based compensation expense, net

$

28 

$