INDEPENDENCE HOLDING COMPANY - Form 10-Q SEC filing
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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 September 30, 2017.

 

[   ]   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

 

581407235

(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 November 3, 2017

Common stock, $ 1.00  par value

14,862,346 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

31

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

44

 

 

 

Item 4. Controls and Procedures

44

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

45

 

 

 

 

Item 1A. Risk Factors

46

 

 

 

 

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

46

 

 

 

 

Item 3.   Defaults Upon Senior Securities

46

 

 

 

 

Item 4.    Mine Safety Disclosures

46

 

 

 

 

Item 5.    Other Information

46

 

 

 

Item 6.    Exhibits

47

 

 

 

Signatures

49

 

 

 

 

 

 

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 10−Q 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)

 

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

(Unaudited)

 

 

 

ASSETS:

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Short-term investments

 

$

50  

 

$

6,912 

Securities purchased under agreements to resell

 

 

20,597  

 

 

28,962 

Trading securities

 

 

516  

 

 

592 

Fixed maturities, available-for-sale

 

 

426,000  

 

 

449,487 

Equity securities, available-for-sale

 

 

5,460  

 

 

5,333 

Other investments

 

 

18,338  

 

 

23,534 

Total investments

 

 

470,961  

 

 

514,820 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

26,565  

 

 

22,010 

Due and unpaid premiums

 

 

32,678  

 

 

42,896 

Due from reinsurers

 

 

383,192  

 

 

440,285 

Premium and claim funds

 

 

13,665  

 

 

17,952 

Goodwill

 

 

50,697  

 

 

41,573 

Other assets

 

 

61,472  

 

 

54,928 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,039,230  

 

$

1,134,464 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Policy benefits and claims

 

$

169,547  

 

$

219,113  

Future policy benefits

 

 

217,415  

 

 

219,450  

Funds on deposit

 

 

143,637  

 

 

145,749  

Unearned premiums

 

 

7,993  

 

 

9,786  

Other policyholders' funds

 

 

10,249  

 

 

9,769  

Due to reinsurers

 

 

5,715  

 

 

35,796  

Accounts payable, accruals and other liabilities

 

 

59,747  

 

 

55,477  

Liabilities attributable to discontinued operations

 

 

-  

 

 

68  

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

614,303  

 

 

695,208  

 

 

 

 

 

 

 

Commitments and contingencies (Note 14)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

2,035  

 

 

-  

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock $1.00 par value, 100,000 shares authorized;

 

 

 

 

 

 

none issued or outstanding

 

 

-  

 

 

-  

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

 

 

 

 

 

 

18,625,458 and 18,620,508 shares issued; and 14,908,517 and

 

 

 

 

 

 

17,102,525 shares outstanding

 

 

18,625  

 

 

18,620  

Paid-in capital

 

 

126,135  

 

 

126,468  

Accumulated other comprehensive loss

 

 

(2,344) 

 

 

(6,964) 

Treasury stock, at cost; 3,716,941 and 1,517,983 shares

 

 

(61,712) 

 

 

(17,483) 

Retained earnings

 

 

339,512  

 

 

315,918  

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

420,216  

 

 

436,559  

NONREDEEMABLE NONCONTROLLING INTERESTS

 

 

2,676  

 

 

2,697  

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

422,892  

 

 

439,256  

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,039,230  

 

$

1,134,464  

 

 

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

REVENUES:

 

 

 

 

 

 

 

 

Premiums earned

$

75,639  

$

67,335  

$

210,507  

$

195,524  

Net investment income

 

4,403  

 

4,004  

 

12,414  

 

12,700  

Fee income

 

2,634  

 

4,050  

 

11,556  

 

12,541  

Other income

 

361  

 

2,261  

 

2,365  

 

8,898  

Net realized investment gains

 

715  

 

2,367  

 

987  

 

3,945  

Other-than-temporary impairment losses:

 

 

 

 

 

 

 

 

Total other-than-temporary impairment losses

 

- 

 

(1,475) 

 

- 

 

(1,475) 

Portion of losses recognized in other comprehensive income (loss)

 

- 

 

-  

 

- 

 

-  

Net impairment losses recognized in earnings

 

- 

 

(1,475) 

 

- 

 

(1,475) 

 

 

 

 

 

 

 

 

 

 

 

83,752  

 

78,542  

 

237,829  

 

232,133  

EXPENSES:

 

 

 

 

 

 

 

 

Insurance benefits, claims and reserves

 

33,536  

 

38,277  

 

103,071  

 

109,497  

Selling, general and administrative expenses

 

42,337  

 

32,823  

 

115,404  

 

97,947  

Interest expense on debt

 

-  

 

440  

 

-  

 

1,366  

 

 

 

 

 

 

 

 

 

 

 

75,873  

 

71,540  

 

218,475  

 

208,810  

 

 

 

 

 

 

 

 

 

Income from continuing operations, before income taxes

 

7,879  

 

7,002  

 

19,354  

 

23,323  

Income taxes (benefits)

 

2,666  

 

2,636  

 

(5,175) 

 

8,566  

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

 

5,213  

 

4,366  

 

24,529  

 

14,757  

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 Income from discontinued operations, before income taxes

 

-  

 

-  

 

-  

 

117,636  

 Income taxes on discontinued operations

 

-  

 

- 

 

-  

 

7,724  

 Income from discontinued operations, net of tax

 

-  

 

-  

 

-  

 

109,912  

 

 

 

 

 

 

 

 

 

Net income

 

5,213  

 

4,366  

 

24,529  

 

124,669  

(Income) loss from nonredeemable noncontrolling interests

 

32  

 

(43) 

 

(4) 

 

(9,900) 

(Income) loss from redeemable noncontrolling interests

 

(16) 

 

-  

 

(29) 

 

-  

 

 

 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

5,229  

$

4,323  

$

24,496  

$

114,769  

 

 

 

 

 

 

 

 

 

Basic income per common share:

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.35 

$

0.25  

$

1.53 

$

0.84  

Income from discontinued operations

 

- 

 

-  

 

- 

 

5.84  

Basic income per common share

$

0.35 

$

0.25  

$

1.53 

$

6.68  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,965 

 

17,120  

 

15,999 

 

17,189  

 

 

 

 

 

 

 

 

 

Diluted income per common share:

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.34 

$

0.25  

$

1.50 

$

0.83  

Income from discontinued operations

 

- 

 

-  

 

- 

 

5.77  

Diluted income per common share

$

0.34 

$

0.25  

$

1.50 

$

6.60  

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

15,274 

 

17,340  

 

16,287 

 

17,402  

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


5


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September  30,

 

September  30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

 

Net income

$

5,213 

$

4,366  

$

24,529  

$

124,669 

Other comprehensive income:

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

Unrealized gains (losses) on available-for-sale securities, pre-tax

 

250 

 

(1,173 

 

7,219  

 

10,734 

Tax expense (benefit) on unrealized gains on available-for-sale securities

 

90 

 

(418 

 

2,599  

 

3,830 

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

 

160 

 

(755 

 

4,620  

 

6,904 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax

 

160 

 

(755 

 

4,620  

 

6,904 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX

 

5,373 

 

3,611  

 

29,149  

 

131,573 

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss, net of tax, attributable to

 

 

 

 

 

 

 

 

noncontrolling interests:

 

 

 

 

 

 

 

 

(Income) loss from noncontrolling interests in subsidiaries

 

16 

 

(43) 

 

(33) 

 

(9,900) 

Other comprehensive income, net of tax, attributable to

 

 

 

 

 

 

 

 

noncontrolling interests:

 

 

 

 

 

 

 

 

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

 

- 

 

47 

 

-  

 

(118) 

Other comprehensive (income) loss, net of tax, attributable to

 

 

 

 

 

 

 

 

   noncontrolling interests

 

- 

 

47 

 

-  

 

(118) 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

16 

 

4 

 

(33) 

 

(10,018) 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

 

 

 

 

   ATTRIBUTABLE TO IHC

$

5,389 

$

3,615  

$

29,116  

$

121,555 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

REDEEMABLE

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

NON-

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

CONTROLLING

 

TOTAL

 

 

STOCK

 

CAPITAL

 

INCOME

 

AT COST

 

EARNINGS

 

EQUITY

 

INTERESTS

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2016

$

18,620 

$

126,468 

$

(6,964) 

$

(17,483) 

$

315,918  

$

436,559  

$

2,697  

$

439,256  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

24,496  

 

24,496  

 

4  

 

24,500  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

income, net of tax

 

 

 

 

 

4,620  

 

 

 

 

 

4,620  

 

-  

 

4,620  

Repurchases of common stock

 

 

 

 

 

 

 

(44,442) 

 

 

 

(44,442) 

 

-  

 

(44,442) 

Common stock dividend ($0.06 per share)

 

 

 

 

 

 

 

 

 

(902) 

 

(902) 

 

 

 

(902) 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

(25) 

 

(25) 

Share-based compensation

 

5 

 

(333) 

 

 

 

213 

 

 

 

(115 

 

-  

 

(115 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

$

18,625 

$

126,135 

$

(2,344) 

$

(61,712) 

$

339,512  

$

420,216  

$

2,676  

$

422,892  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.


7


 

 

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

2017

 

 

2016

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

24,529  

 

$

124,669 

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

operating  activities:

 

 

 

 

 

Gain on disposal of discontinued operations, net of tax

 

-  

 

 

(109,447) 

Amortization of deferred acquisition costs

 

269  

 

 

245  

Net realized investment gains

 

(987) 

 

 

(3,945) 

Other-than-temporary impairment losses

 

-  

 

 

1,475  

Equity (income) loss from equity method investments

 

(1,412) 

 

 

7  

Depreciation and amortization

 

1,379  

 

 

1,482  

Deferred tax expense

 

1,853  

 

 

2,565  

Other

 

4,852  

 

 

6,683  

 Changes in assets and liabilities:

 

 

 

 

 

Net sales of trading securities

 

-  

 

 

3,180  

Change in insurance liabilities

 

(83,750) 

 

 

(41,713) 

Change in  amounts due from reinsurers

 

57,094  

 

 

4,227  

Change in premium and claim funds

 

4,287  

 

 

(4,835) 

Change in current income tax liability

 

(8,604) 

 

 

(6,550) 

Change in due and unpaid premiums

 

10,218  

 

 

11,621  

Other operating activities

 

6,302  

 

 

(6,417) 

 

 

 

 

 

 

Net change in cash from operating activities

 

16,030  

 

 

(16,753) 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

Net (purchases) sales and maturities of short-term investments

 

6,849  

 

 

(8,104) 

Net sales of securities under resale agreements

 

8,365  

 

 

17,003  

Sales of equity securities

 

-  

 

 

2,429  

Sales of fixed maturities

 

158,062  

 

 

335,562  

Maturities and other repayments of fixed maturities

 

16,841  

 

 

35,505  

Purchases of fixed maturities

 

(145,444) 

 

 

(406,348) 

Proceeds on sales of subsidiaries, net of cash divested

 

-  

 

 

137,115  

Payments to acquire business, net of cash acquired

 

(12,323) 

 

 

-  

Distributions from other investments

 

5,246  

 

 

-  

Proceeds on sales of other investments

 

-  

 

 

2,064  

Purchases of other investments

 

(602) 

 

 

(3,371) 

Other investing activities

 

(565) 

 

 

(3,433) 

 

 

 

 

 

 

Net change in cash from investing activities

 

36,429  

 

 

108,422  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:

 

 

 

 

 

Repurchases of common stock

 

(44,290) 

 

 

(3,522) 

Cash paid in acquisitions of noncontrolling interests 

 

-  

 

 

(18,141) 

Withdrawals of investment-type insurance contracts

 

(1,359) 

 

 

(1,447) 

Repayments of debt

 

-  

 

 

(4,789) 

Dividends paid

 

(1,927) 

 

 

(1,588) 

Other financing activities

 

(328 

 

 

(474) 

 

 

 

 

 

 

Net change in cash from financing activities

 

(47,904) 

 

 

(29,961) 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

4,555  

 

 

61,708  

Cash and cash equivalents, beginning of year

 

22,010  

 

 

17,500  

 

 

 

 

 

 

Cash and cash equivalents, end of period

$

26,565  

 

$

79,208  

 

 

 

 

 

 

 

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"), and Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc., IHC Carrier Solutions, Inc. and a majority interest in PetPartners, Inc. IHC also owns a significant equity interest in Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health insurance. 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 approximately 61% of IHC's outstanding common stock at September 30, 2017.  

 

(B)     Consolidation 

 

On August 31, 2016, IHC took AMIC Holdings, Inc. (“AMIC”) private by way of a statutory “short-form” merger. The company paid $18,141,000 for the remaining shares of AMIC common stock owned by noncontrolling interests and as a result, the Company now owns all of the outstanding common stock of AMIC. In connection with the transaction, $2,230,000 was charged to paid-in capital representing: (i) the difference between the fair value of the consideration paid for the shares and the carrying amount of noncontrolling interests; plus (ii) specific, direct costs of the transaction.  

 

(C)     Basis of Presentation 

 

The unaudited 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 unaudited 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 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 unaudited 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 and nine months ended September 30, 2017 are not necessarily indicative of the results to be anticipated for the entire year.

 


9


 

(D)   Recent Accounting Pronouncements 

 

Recently Adopted Accounting Standards

 

In October 2016, the Financial Accounting Standards Board (“FASB”) issued guidance that amends the consolidation analysis for a reporting entity that is the single decision maker of a variable interest entity. The amendments in this guidance require the decision maker’s evaluation of its interests held through related parties that are under common control on a proportionate basis rather than in their entirety when determining whether it is the primary beneficiary of that variable interest entity. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued guidance that simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. New guidance related to the classifications in the statement of cash flows were applied on a prospective transition basis. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

In March 2016, the FASB issued guidance that eliminates the requirement for retroactive adjustments on the date that a previously held investment qualifies for the equity method of accounting as a result of an increase in ownership interest or degree of influence. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

In May 2017, the FASB issued guidance to provide clarity and reduce both (i) diversity in practice; and (ii) cost and complexity when accounting for a change in the terms or conditions of a share-based payment award. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In March 2017, the FASB issued guidance requiring premium amortization on callable debt securities to be amortized to the earliest call date to more closely align the amortization period with expectations incorporated in market pricing of the underlying securities. The amendments in this guidance should be applied using a modified retrospective approach for annual periods beginning after December 15, 2018, including interim periods within those periods. Additional disclosures are required in the period of adoption. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In February 2017, the FASB issued guidance to simplify the accounting for sales of nonfinancial assets by clarifying the definition of nonfinancial assets and adding guidance pertaining to partial sales of nonfinancial assets. The amendments in this guidance can be applied using either a retrospective approach or a modified retrospective approach in annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance to simplify the test for goodwill impairment by eliminating Step 2 in the goodwill impairment test. Instead, under the amendments in this Update, an entity should perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments in this guidance are effective for public business entities for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this


10


guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2017, the FASB issued guidance that clarifies the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The amendments in this guidance should be applied prospectively in annual periods beginning after December 15, 2017, including interim periods within those periods, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In November 2016, the FASB issued guidance requiring entities to show the changes in the total cash, cash equivalents, restricted cash and restricted cash equivalent in the statement of cash flows. The amendments in this guidance should be applied retrospectively and is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this guidance should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In August 2016, the FASB issued guidance that changes how certain cash receipts and cash payments are presented and classified in the cash flows statement. The amendments in this Update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued guidance requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. An allowance for credit losses will be deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected with changes in the allowance recorded in earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than the currently applied U.S. GAAP method of taking a permanent impairment of the security, which would be limited to the amount by which fair value is below the amortized cost. Certain existing requirements used to evaluate credit losses have been removed. For public entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments in this guidance should be applied through a cumulative effect adjustment to retained earnings upon adoption as of the beginning of the first reporting period in which the guidance is effective. Management is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The amendments in this guidance are effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, using a modified retrospective approach. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

 

In January 2016, the FASB issued guidance that eliminates the requirement to classify equity securities with readily determinable fair values as trading or available-for-sale. The guidance requires equity securities, other than those that result in consolidation or are accounted for under the equity method, (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income, simplifies the impairment


11


assessment of equity securities without readily determinable fair values and requires changes in disclosure requirements. For public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. The amendments in this Update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the guidance. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.

 

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. In 2016, additional guidance and technical corrections were issued to clarify certain aspects of the implementation guidance and to clarify the identification of performance obligations. In August 2015, the effective date of this guidance has been deferred. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company anticipates that any impact will only relate to contracts with customers outside the scope of Accounting Standards Codification Topic 944, Financial Services - Insurance. Our administrative and other service contracts that will be subject to the amendments in this Update are recorded in the Fee Income line item of the Condensed Consolidated Statement of Income and represent approximately 5% of our consolidated revenues for the nine months ended September 30, 2017. The guidance will be applied retrospectively with a cumulative effect adjustment on the date of initial application. Management is still in the process of evaluating the impact that the adoption of this guidance will have on the Company’s consolidated financial statements and does not anticipate any significant changes in internal controls over financial reporting as a result of its implementation.

 

Note 2.   Income Per Common Share 

 

Diluted income 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 309,000 and 288,000 shares for the three months and nine months ended September 30, 2017, respectively, and 220,000 and 213,000 shares for the three months and nine months ended September 30, 2016, respectively.

 


12


 

The following is a reconciliation of income available to common shareholders used to calculate income per share for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Income from continuing operations, net of tax

$

5,213  

$

4,366  

$

24,529  

$

14,757 

Less:  (Income) loss from continuing operations attributable to

 

 

 

 

 

 

 

 

     noncontrolling interests

 

16  

 

(43) 

 

(33) 

 

(348)

 

 

 

 

 

 

 

 

 

   Income from continuing operations attributable to IHC

 

 

 

 

 

 

 

 

     common shareholders

$

5,229  

$

4,323  

$

24,496  

$

14,409 

 

 

 

 

 

 

 

 

 

Income from discontinued operations, net of tax

$

-  

$

-  

$

-  

$

109,912 

Less:  Income from discontinued operations attributable to

 

 

 

 

 

 

 

 

     noncontrolling interests

 

-  

 

-  

 

-  

 

(9,552)

 

 

 

 

 

 

 

 

 

   Income from discontinued operations attributable to IHC

 

 

 

 

 

 

 

 

     common shareholders

$

-  

$

-  

$

-  

$

100,360 

 

 

 

 

 

 

 

 

 

  Net income attributable to IHC

$

5,229  

$

4,323  

$

24,496  

$

114,769 

 

Note 3.   Discontinued Operations 

 

On March 31, 2016, IHC and a subsidiary of AMIC, sold the stock of IHC Risk Solutions, LLC (“Risk Solutions”) to Swiss Re Corporate Solutions, a division of Swiss Re (“Swiss Re”).  In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is co-insured by Westport Insurance Corporation (“Westport”), Swiss Re’s largest US carrier, as of January 1, 2016.  The aggregate purchase price, prior to closing adjustments, was $152,500,000 in cash. Approximately 89% of the purchase price was allocated to AMIC, with the balance being paid to Standard Security Life and other IHC subsidiaries. The Company recorded a gain of $99,934,000, net of taxes and amounts attributable to noncontrolling interests, as a result of the transaction. The aforementioned transaction, which includes the sale of Risk Solutions and the corresponding coinsurance agreement, is collectively referred to as the “Risk Solutions Sale and Coinsurance Transaction”.  IHC’s block of Medical Stop-Loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represented a strategic shift that has had a major effect on the Company’s operations and financial results. The disposal transaction qualified for reporting as a discontinued operation in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. Aside from reinsurance and marketing of Westport small group stop-loss, there has been no further involvement with the discontinued operation.

 


13


 

The following is a reconciliation of the major line items constituting the pretax profit of discontinued operations included in the Condensed Consolidated Statement of Income for the periods indicated (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2016

 

2016

Revenue

$

-  

$

6,406 

Selling, general and administrative expenses

 

-  

 

5,689 

 

 

 

 

 

Pretax profit of discontinued operations

 

-  

 

717 

Gain on disposal of discontinued operations, pretax

 

-  

 

116,919 

 

 

 

 

 

    Income from discontinued operations, before income taxes

 

-  

 

117,636 

     Income taxes (benefits) on discontinued operations

 

-  

 

7,724 

 

 

 

 

 

      Income from discontinued operations

$

-  

$

109,912 

 

Liabilities attributable to discontinued operations at September 30, 2017 and December 31, 2016 consist of $0 and $68,000, respectively, of accounts payable and accrued liabilities.

 

Total operating cash flows from discontinued operations for the three months and nine months ended September 30, 2016 were $0 and $339,000, respectively. The Company elected to classify the proceeds received from the sale of discontinued operations in the investing activities section of Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2016. 

 

In connection with the Risk Solutions Sale and Coinsurance Transaction in March 2016, AMIC utilized a significant amount of its Federal NOL carryforwards and made a corresponding adjustment to its valuation allowance. On a consolidated basis, the Company recorded income taxes on discontinued operations of $7,724,000 for the nine months ended September 30, 2016, consisting of $5,777,000 of state taxes and $1,947,000 of Federal taxes, net of a $38,419,000 decrease in AMIC’s valuation allowance.


14


Note 4.   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):

 

 

 

September 30, 2017 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

159,753 

$

894 

$

(2,471) 

$

158,176 

CMOs - residential (1)

 

7,011 

 

- 

 

(106) 

 

6,905 

U.S. Government obligations

 

44,077 

 

57 

 

(257) 

 

43,877 

Agency MBS - residential (2)

 

16 

 

- 

 

-  

 

16 

GSEs (3)

 

9,992 

 

1 

 

(211) 

 

9,782 

States and political subdivisions

 

194,724 

 

1,143 

 

(2,828) 

 

193,039 

Foreign government obligations

 

4,276 

 

22 

 

(85) 

 

4,213 

Redeemable preferred stocks

 

10,008 

 

116 

 

(132) 

 

9,992 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

429,857 

$

2,233 

$

(6,090) 

$

426,000 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

1,612 

$

191 

$

(18) 

$

1,785 

Nonredeemable preferred stocks

 

3,587 

 

88 

 

- 

 

3,675 

 

 

 

 

 

 

 

 

 

Total equity securities

$

5,199 

$

279 

$

(18) 

$

5,460 

 

 

 

December 31, 2016 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

192,976 

$

209 

$

(5,490) 

$

187,695 

CMOs - residential (1)

 

6,021 

 

8 

 

(116) 

 

5,913 

U.S. Government obligations

 

43,417 

 

133 

 

(441) 

 

43,109 

Agency MBS - residential (2)

 

22 

 

1 

 

-  

 

23 

GSEs (3)

 

10,301 

 

1 

 

(422) 

 

9,880 

States and political subdivisions

 

191,146 

 

780 

 

(5,115) 

 

186,811 

Foreign government obligations

 

5,098 

 

13 

 

(157) 

 

4,954 

Redeemable preferred stocks

 

11,454 

 

96 

 

(448) 

 

11,102 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

460,435 

$

1,241 

$

(12,189) 

$

449,487 

 

EQUITY SECURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Common stocks

$

1,612 

$

178 

$

-  

$

1,790 

Nonredeemable preferred stocks

 

3,588 

 

30 

 

(75) 

 

3,543 

 

 

 

 

 

 

 

 

 

Total equity securities

$

5,200 

$

208 

$

(75) 

$

5,333 

 

(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.  


15


 

 

The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2017, 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.

 

 

 

 

 

AMORTIZED

 

 

FAIR

 

 

 

COST

 

 

VALUE

 

 

 

 

 

 

 

Due in one year or less

 

$

29,686

 

$

29,631

Due after one year through five years

 

 

113,190

 

 

112,572

Due after five years through ten years

 

 

145,877

 

 

145,322

Due after ten years

 

 

124,085

 

 

121,772

Fixed maturities with no single maturity date

 

 

17,019

 

 

16,703

 

 

 

 

 

 

 

 

 

$

429,857

 

$

426,000

 

 

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):

 

 

 

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

84,636

 

$

1,087 

 

$

25,563

 

$

1,384 

 

$

110,199

$

2,471 

CMOs - residential

 

4,730

 

 

101 

 

 

2,105

 

 

5 

 

 

6,835

 

106 

U.S. Government obligations

 

18,021

 

 

80 

 

 

12,619

 

 

177 

 

 

30,640

 

257 

GSEs

 

3,286

 

 

65 

 

 

6,480

 

 

146 

 

 

9,766

 

211 

States and political subdivisions

 

88,326

 

 

1,413 

 

 

35,771

 

 

1,415 

 

 

124,097

 

2,828 

Foreign government obligations

 

-

 

 

- 

 

 

3,006

 

 

85 

 

 

3,006

 

85 

Redeemable preferred stocks

 

-

 

 

- 

 

 

3,631

 

 

132 

 

 

3,631

 

132 

  Total fixed maturities

 

198,999

 

 

2,746 

 

 

89,175

 

 

3,344 

 

 

288,174

 

6,090 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stocks

 

485

 

 

18 

 

 

- 

 

 

- 

 

 

485 

 

18 

  Total equity securities

 

485

 

 

18 

 

 

- 

 

 

- 

 

 

485 

 

18 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      securities

$

199,484

 

$

2,764 

 

$

89,175

 

$

3,344 

 

$

288,659

$

6,108 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

107

 

 

 

 

 

44

 

 

 

 

 

151

 

 

 


16


 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

145,205

 

$

3,818 

 

$

19,841 

 

$

1,672 

 

$

165,046 

$

5,490 

CMO’s - residential

 

5,038

 

 

116 

 

 

- 

 

 

- 

 

 

5,038 

 

116 

U.S. Government obligations

 

28,406

 

 

441 

 

 

- 

 

 

- 

 

 

28,406 

 

441 

GSEs

 

3,640

 

 

166 

 

 

6,220 

 

 

256 

 

 

9,860 

 

422 

States and political subdivisions

 

144,357

 

 

4,561 

 

 

18,132 

 

 

554 

 

 

162,489 

 

5,115 

Foreign government obligations

 

3,738

 

 

157 

 

 

- 

 

 

- 

 

 

3,738 

 

157 

Redeemable preferred stocks

 

-

 

 

- 

 

 

3,315 

 

 

448 

 

 

3,315 

 

448 

  Total fixed maturities

 

330,384

 

 

9,259 

 

 

47,508 

 

 

2,930 

 

 

377,892 

 

12,189 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonredeemable preferred stocks

 

826

 

 

25 

 

 

1,277 

 

 

50 

 

 

2,103 

 

75 

  Total equity securities

 

826

 

 

25 

 

 

1,277 

 

 

50 

 

 

2,103 

 

75 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      securities

$

331,210

 

$

9,284 

 

$

48,785 

 

$

2,980 

 

$

379,995 

$

12,264 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of securities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

156

 

 

 

 

 

23

 

 

 

 

 

179

 

 

 

Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 2017 and December 31, 2016 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 September 30, 2017.

 

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

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

  Fixed maturities

$

719  

$

2,226  

$

1,062  

$

3,847  

  Common stocks

 

-  

 

220  

 

-  

 

220  

     Total  available-for-sale securities

 

719  

 

2,446  

 

1,062  

 

4,067  

 

 

 

 

 

 

 

 

 

Trading securities

 

-  

 

-  

 

-  

 

-  

     Total realized gains

 

719  

 

2,446  

 

1,062  

 

4,067  

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on trading securities:

 

 

 

 

 

 

 

 

  Change in unrealized gains (losses) on trading securities

 

(4) 

 

(80) 

 

(76) 

 

(124) 

     Total unrealized gains (losses)  on trading securities

 

(4) 

 

(80) 

 

(76) 

 

(124) 

 

 

 

 

 

 

 

 

 

Gains (losses) on other investments

 

-  

 

1  

 

1  

 

2  

 

 

 

 

 

 

 

 

 

Net realized investment gains

$

715  

$

2,367  

$

987  

$

3,945  

 

For the three months and nine months ended September 30, 2017, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $29,564,000 and $157,541,000, respectively, and the Company realized gross gains of $747,000 and $2,052,000, respectively, and gross losses of $0 and $844,000, respectively, on those sales. For the three months and nine months ended September 30, 2016, proceeds from sales of available-for-sale securities, excluding paydowns and maturities, were $179,735,000


17


and $339,171,000, respectively, and the Company realized gross gains of $2,668,000 and $4,521,000, respectively, and gross losses of $94,000 and $275,000, 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 2016 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 the first nine months of 2017. In the three months and nine months ended September 30, 2016, the Company recognized an other-than-temporary impairment loss of $1,475,000 on certain fixed maturities available-for-sale due to credit losses. The Company determined it was more likely than not that the securities would be sold before the recovery of their amortized cost basis.

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2017

 

2016

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Balance at beginning of year

$

- 

$

- 

$

- 

$

473  

Securities sold

 

- 

 

- 

 

- 

 

(473) 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

- 

$

- 

$

- 

$

-  

 

 

 

 

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 of municipal tax credit strips.  


18


The valuation method used to determine the fair value of municipal tax credit strips is the present value of the remaining future tax credits (at the original issue discount rate) as presented in the redemption tables in the Municipal Prospectuses. This original issue discount is accreted into income on a constant yield basis over the term of the debt instrument. 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. 

 

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

 

 

 

September 30, 2017

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

158,176 

$

- 

$

158,176 

  CMOs - residential

 

- 

 

 

6,905 

 

- 

 

6,905 

  US Government obligations

 

- 

 

 

43,877 

 

- 

 

43,877 

  Agency MBS - residential

 

- 

 

 

16 

 

- 

 

16 

  GSEs

 

- 

 

 

9,782 

 

- 

 

9,782 

  States and political subdivisions

 

- 

 

 

191,124 

 

1,917 

 

193,041 

  Foreign government obligations

 

- 

 

 

4,213 

 

- 

 

4,213 

  Redeemable preferred stocks

 

9,990 

 

 

- 

 

- 

 

9,990 

     Total fixed maturities

 

9,990 

 

 

414,093 

 

1,917 

 

426,000 

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

  Common stocks

 

1,785 

 

 

- 

 

- 

 

1,785 

  Nonredeemable preferred stocks

 

3,675 

 

 

- 

 

- 

 

3,675 

     Total equity securities

 

5,460 

 

 

- 

 

- 

 

5,460 

 

 

 

 

 

 

 

 

 

 

Trading securities - equities

 

516 

 

 

- 

 

- 

 

516 

      Total trading securities

 

516 

 

 

- 

 

- 

 

516 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

15,966 

 

$

414,093 

$

1,917 

$

431,976 

 

 

 

December 31, 2016

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

-

 

$

187,695

$

-

$

187,695

  CMOs - residential

 

-

 

 

5,913

 

-

 

5,913

  US Government obligations

 

-

 

 

43,109

 

-

 

43,109

  Agency MBS - residential

 

-

 

 

23

 

-

 

23

  GSEs

 

-

 

 

9,880

 

-

 

9,880

  States and political subdivisions

 

-

 

 

184,778

 

2,033

 

186,811

  Foreign government obligations

 

-

 

 

4,954

 

-

 

4,954

  Redeemable preferred stocks

 

11,102

 

 

-

 

-

 

11,102

     Total fixed maturities

 

11,102

 

 

436,352

 

2,033

 

449,487

 

 

 

 

 

 

 

 

 

 

Equity securities available-for-sale:

 

 

 

 

 

 

 

 

 

  Common stocks

 

1,790

 

 

-

 

-