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

 

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

For the quarterly period ended March 31, 2021.

 

  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, CT                      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.

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $1.00 par value

IHC

NYSE

 

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, if any, every Interactive Data File required to be submitted 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 such files).   Yes   [X]   No [  ]

 

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

 

Large Accelerated Filer [    ]

Accelerated Filer  [X]

Non-Accelerated Filer   [    ]

Smaller Reporting Company  

Emerging Growth Company   

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   

Yes      No  [X]

 

As of May 7, 2021, the registrant had 14,639,449 shares of Common Stock outstanding.


1


 

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 Statements 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

27

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

38

 

 

 

Item 4. Controls and Procedures

38

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.    Legal Proceedings

38

 

 

 

 

Item 1A. Risk Factors

39

 

 

 

 

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

40

 

 

 

 

Item 3.   Defaults Upon Senior Securities

40

 

 

 

 

Item 4.    Mine Safety Disclosures

40

 

 

 

 

Item 5.    Other Information

40

 

 

 

Item 6.    Exhibits

40

 

 

 

Signatures

43

 

 

 

 

 

 

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)

 

 

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

(Unaudited)

 

 

ASSETS:

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

Short-term investments

 

$

1,559  

 

$

2,634  

Securities purchased under agreements to resell

 

 

145,392  

 

 

49,990  

Fixed maturities, available-for-sale

 

 

390,942  

 

 

406,649  

Equity securities

 

 

2,671  

 

 

6,119  

Other investments

 

 

10,768  

 

 

8,238  

Total investments

 

 

551,332  

 

 

473,630  

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

22,123  

 

 

72,089  

Due and unpaid premiums

 

 

40,688  

 

 

29,182  

Due from reinsurers

 

 

357,053  

 

 

357,205  

Goodwill

 

 

74,900  

 

 

74,900  

Other assets

 

 

78,876  

 

 

76,150  

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

1,124,972  

 

$

1,083,156  

 

 

 

 

 

 

 

LIABILITIES AND  EQUITY:

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

 

Policy benefits and claims

 

$

193,282  

 

$

179,232  

Future policy benefits

 

 

196,439  

 

 

198,086  

Funds on deposit

 

 

141,891  

 

 

141,376  

Unearned premiums

 

 

43,798  

 

 

12,789  

Other policyholders' funds

 

 

11,920  

 

 

12,001  

Due to reinsurers

 

 

2,634  

 

 

3,872  

Accounts payable, accruals and other liabilities

 

 

58,961  

 

 

63,682  

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

648,925  

 

 

611,038  

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

2,258  

 

 

2,312  

 

 

 

 

 

 

 

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 shares issued; and 14,639,449 and

 

 

 

 

 

 

14,643,047 shares outstanding

 

 

18,625  

 

 

18,625  

Paid-in capital

 

 

125,189  

 

 

124,757  

Accumulated other comprehensive income

 

 

2,268  

 

 

4,197  

Treasury stock, at cost; 3,986,009 and 3,982,411 shares

 

 

(77,228) 

 

 

(77,088) 

Retained earnings

 

 

404,894  

 

 

399,273  

 

 

 

 

 

 

 

TOTAL IHC STOCKHOLDERS’ EQUITY

 

 

473,748  

 

 

469,764  

NONREDEEMABLE NONCONTROLLING INTERESTS

 

 

41  

 

 

42  

 

 

 

 

 

 

 

TOTAL EQUITY

 

 

473,789  

 

 

469,806  

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

$

1,124,972  

 

$

1,083,156  

 

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,

 

2021

 

 

2020

REVENUES:

 

 

 

 

 

Premiums earned

$

115,141  

 

$

96,050  

Net investment income

 

2,592  

 

 

3,240  

Fee income

 

6,356  

 

 

3,942  

Other income

 

353  

 

 

477  

Net investment gains

 

215  

 

 

288  

 

 

 

 

 

 

 

124,657  

 

 

103,997  

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

Insurance benefits, claims and reserves

 

67,378  

 

 

54,058  

Selling, general and administrative expenses

 

50,420  

 

 

44,574  

 

 

 

 

 

 

 

117,798  

 

 

98,632  

 

 

 

 

 

 

Income before income taxes

 

6,859  

 

 

5,365  

Income taxes

 

1,293  

 

 

1,043  

 

 

 

 

 

 

Net income

 

5,566  

 

 

4,322  

Loss from nonredeemable noncontrolling interests

 

1  

 

 

9  

(Income) loss from redeemable noncontrolling interests

 

54  

 

 

(53) 

 

 

 

 

 

 

NET INCOME ATTRIBUTABLE TO IHC

$

5,621  

 

$

4,278  

 

 

 

 

 

 

Basic income per common share

$

0.38 

 

$

0.29 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING

 

14,641  

 

 

14,856 

 

 

 

 

 

 

Diluted income per common share

$

0.38 

 

$

0.29 

 

 

 

 

 

 

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING

 

14,778  

 

 

14,911 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

March  31,

 

 

2021

 

2020

 

 

 

Net income

$

5,566  

$

4,322  

Other comprehensive loss:

 

 

 

 

Available-for-sale securities:

 

 

 

 

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

 

(2,460) 

 

(134) 

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

 

(531) 

 

(23) 

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

 

(1,929) 

 

(111) 

 

 

 

 

 

Other comprehensive loss, net of tax

 

(1,929) 

 

(111) 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX

 

3,637  

 

4,211  

 

 

 

 

 

Comprehensive (income) loss, net of tax, attributable to noncontrolling interests:

 

 

 

 

(Income) loss from noncontrolling interests in subsidiaries

 

55 

 

(44) 

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

 

-  

 

-  

 

 

 

 

 

COMPREHENSIVE (INCOME) LOSS, NET OF TAX,

 

 

 

 

   ATTRIBUTABLE TO NONCONTROLLING INTERESTS

 

55 

 

(44) 

 

 

 

 

 

COMPREHENSIVE INCOME, NET OF TAX,

 

 

 

 

   ATTRIBUTABLE TO IHC

$

3,692  

$

4,167  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

Three Months Ended March 31, 2021 and 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ACCUMULATED

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER

 

TREASURY

 

 

 

TOTAL IHC

 

NONREDEEMABLE

 

 

 

 

COMMON

 

PAID-IN

 

COMPREHENSIVE

 

STOCK,

 

RETAINED

 

STOCKHOLDERS'

 

NONCONTROLLING

 

TOTAL

 

STOCK

 

CAPITAL

 

INCOME

 

AT COST

 

EARNINGS

 

EQUITY

 

INTERESTS

 

EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2020

$

18,625 

$

124,757  

$

4,197  

$

(77,088) 

$

399,273  

$

469,764  

$

42  

$

469,806  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

5,621  

 

5,621  

 

(1) 

 

5,620  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loss, net of tax

 

 

 

 

 

(1,929) 

 

 

 

 

 

(1,929) 

 

-  

 

(1,929) 

Repurchases of common stock

 

 

 

 

 

 

 

(140) 

 

 

 

(140) 

 

-  

 

(140) 

Share-based compensation

 

 

 

432  

 

 

 

  

 

 

 

432  

 

-  

 

432  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2021

$

18,625 

$

125,189  

$

2,268  

$

(77,228) 

$

404,894  

$

473,748  

$

41  

$

473,789  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2019

$

18,625 

$

122,717 

$

1,212  

$

(69,724) 

$

386,864  

$

459,694  

$

18  

$

459,712  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

4,278  

 

4,278  

 

(9) 

 

4,269  

Other comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

loss, net of tax

 

 

 

 

 

(111 

 

 

 

 

 

(111 

 

- 

 

(111 

Repurchases of common stock

 

 

 

 

 

 

 

(1,472) 

 

 

 

(1,472) 

 

- 

 

(1,472) 

Common stock dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    ($0.22 per share)

 

 

 

 

 

 

 

 

 

(3,040) 

 

(3,040) 

 

- 

 

(3,040) 

Distributions to noncontrolling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

interests

 

 

 

 

 

 

 

 

 

 

 

- 

 

(3) 

 

(3) 

Share-based compensation

 

 

 

543 

 

 

 

  

 

 

 

543  

 

- 

 

543  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2020

$

18,625 

$

123,260 

$

1,101  

$

(71,196) 

$

388,102  

$

459,892  

$

6 

$

459,898  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

2021

 

 

2020

CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:

 

 

 

 

 

Net income

$

5,566  

 

$

4,322  

Adjustments to reconcile net income to net change in cash from

 

 

 

 

 

operating  activities:

 

 

 

 

 

Amortization of deferred acquisition costs

 

220  

 

 

120  

Net amortization of purchased premium and discount in net investment income

 

1,169  

 

 

857  

Net investment (gains)

 

(215) 

 

 

(288) 

Depreciation and amortization

 

1,118  

 

 

908  

Other

 

1,572  

 

 

408  

 Changes in assets and liabilities:

 

 

 

 

 

Change in insurance liabilities

 

42,672  

 

 

25,009  

Change in  amounts due from reinsurers

 

152  

 

 

668  

Change in claim fund balances

 

(130) 

 

 

58  

Change in due and unpaid premiums

 

(11,505) 

 

 

(6,377) 

Change in contract asset

 

(1,186) 

 

 

-  

Other operating activities

 

(2,900) 

 

 

(7,858) 

 

 

 

 

 

 

Net change in cash from operating activities

 

36,533  

 

 

17,827  

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:

 

 

 

 

 

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

 

1,060  

 

 

(73,952) 

Net (purchases) sales of securities under resale agreements

 

(95,402) 

 

 

88,780  

Sales of equity securities

 

3,494  

 

 

-  

Sales of fixed maturities

 

-  

 

 

33,328  

Maturities and other repayments of fixed maturities

 

17,963  

 

 

11,208  

Purchases of fixed maturities

 

(7,931) 

 

 

(66,621) 

Payments to acquire business, net of cash acquired

 

-  

 

 

(2,597) 

Payments to acquire other investments

 

(2,500) 

 

 

(1,250) 

Other investing activities

 

(398) 

 

 

(719) 

 

 

 

 

 

 

Net change in cash from investing activities

 

(83,714) 

 

 

(11,823) 

 

 

 

 

 

 

CASH FLOWS PROVIDED BY (USED BY)  FINANCING ACTIVITIES:

 

 

 

 

 

Repurchases of common stock

 

(140) 

 

 

(1,335) 

Withdrawals of investment-type insurance contracts

 

(64) 

 

 

(173) 

Dividends paid

 

(3,221) 

 

 

(2,973) 

Other financing activities

 

  -  

 

 

(3) 

 

 

 

 

 

 

Net change in cash from financing activities

 

(3,425) 

 

 

(4,484) 

 

 

 

 

 

 

Net change in cash, cash equivalents and restricted cash

 

(50,606) 

 

 

1,520  

Cash, cash equivalents and restricted cash, beginning of year

 

74,793  

 

 

24,631  

 

 

 

 

 

 

Cash, cash equivalents and restricted cash, end of period

$

24,187  

 

$

26,151  

 

 

 

 

 

 

 

 

 

 

 

 

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 underwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group life insurance 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; and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. (“IHCSB”), IHC Brokerage Group, Inc. (“IBG”), INSXCloud, Inc. (“INSXCloud”) (formerly My1HR, Inc.) and a majority interest in PetPartners, Inc. (“PetPartners”), collectively the “IHC Agencies” and its lead generation company, Torchlight Technology Group LLC., (“Torchlight”). Standard Security Life, Madison National Life and Independence American Insurance Company 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 financial holding company, and its affiliated entities, held approximately 62% of IHC's outstanding common stock at March 31, 2021.  

 

(B)     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 March 2020, the World Health Organization declared the outbreak of COVID-19 a global health pandemic and the United States declared a national health emergency. COVID-19 has led to largescale disruption in the global economy, market instability and widespread unemployment in the United States. The COVID-19 outbreak continues to be a fluid situation and as it evolves, the duration of COVID-19 and its potential effects on our business cannot be certain. Regulatory mandates have affected, and we anticipate will continue to impact, the insurance industry. We currently cannot predict if there will be a material impact to our business, results of operations or financial condition in future reporting periods. Consequently, future changes in market conditions may impact estimates used in the preparation of our financial statements associated with evaluations of goodwill and other intangible assets for impairment, estimates associated with the determination of valuation allowances related to net operating loss carryforwards, and estimates of certain losses under insurance contracts. These estimates may all be subject to substantial adjustments in future periods.  In addition, volatile market conditions may result in further declines in the fair value of our investment portfolio and possible impairments of certain securities.

 


9


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, 2021 are not necessarily indicative of the results to be anticipated for the entire year.

 

(C)  Reclassifications 

 

Certain amounts in prior year’s condensed consolidated financial statements and Notes thereto have been reclassified to conform to the 2021 presentation.

 

(D)   Recent Accounting Pronouncements 

 

Recently Adopted Accounting Standards

 

In December 2019, the Financial Accounting Standard Board (“FASB”) issued guidance to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes, the requirement to allocate current and deferred tax expense to legal entities not subject to tax in its separate financial statements, enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. 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 August 2018, the FASB issued guidance to improve existing measurements, presentation and disclosure requirements for long-duration contracts issued by insurance entities. The amendments in this guidance requires an entity to (1) review and update assumptions used to measure cash flows at least annually as well as update the discount rate assumption at each reporting date; (2) measure market risk benefits associated with deposit contracts at fair value; (3) disclose liability rollforwards and information about significant inputs, judgements assumptions, and methods used in measurement. Additionally, it simplifies the amortization of deferred acquisition costs and other balances on a constant level basis over the expected term of the related contracts. In 2019, the FASB delayed the original effective dates. For smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Upon adoption, the amendments in this guidance should be applied to contracts in-force as of the beginning of the earliest period presented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and potential impact that the adoption of this guidance will have 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. In 2019, the FASB provided transition relief by providing entities with an option to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments upon adoption and delayed the original effective dates. For smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. 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


10


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.

 

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 137,000 and 55,000 shares for the three months ended March 31, 2021 and 2020, respectively.

 

Note 3.Cash, Cash Equivalents and Restricted Cash 

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets to the amounts shown in the Condensed Consolidated Statements of Cash Flows for the periods indicated (in thousands): 

 

 

 

March 31,

 

 

2021

 

2020

 

 

Cash and cash equivalents

$

22,123 

$

23,048 

Restricted cash included in other assets

 

2,064 

 

3,103 

 

 

 

 

 

Total cash, cash equivalents and restricted cash

$

24,187 

$

26,151 

 

 

 

 

 

 

Restricted cash includes insurance premiums collected from insureds that are pending remittance to insurance carriers and/or payment of insurance claims and commissions to third party administrators. These amounts are required to be set aside by contractual agreements with the insurance carriers and are included in other assets on the Condensed Consolidated Balance Sheets.

 

Note 4.Investment Securities 

 

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

 

 

 

March 31, 2021 

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

164,312  

$

2,908  

$

(2,071) 

$

165,149  

CMOs – residential (1)

 

4,976  

 

175  

 

(13) 

 

5,138  

U.S. Government obligations

 

56,963  

 

672  

 

(13) 

 

57,622  

Agency MBS - residential (2)

 

38  

 

-  

 

(4) 

 

34  

GSEs (3)

 

5,755  

 

-  

 

(168) 

 

5,587  

States and political subdivisions

 

151,162  

 

1,994  

 

(810) 

 

152,346  

Foreign government obligations

 

4,854  

 

212  

 

-  

 

5,066  

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

388,060  

$

5,961  

$

(3,079) 

$

390,942  

 


11


 

 

 

 

December 31, 2020

 

 

 

 

GROSS 

 

GROSS 

 

 

 

 

AMORTIZED

 

UNREALIZED

 

UNREALIZED

 

FAIR 

 

 

COST 

 

GAINS 

 

LOSSES 

 

VALUE 

 

 

 

 

FIXED MATURITIES

 

 

 

 

 

 

 

 

AVAILABLE-FOR-SALE:

 

 

 

 

 

 

 

 

Corporate securities

$

175,541 

$

3,735 

$

(2,113) 

$

177,163 

CMOs – residential (1)

 

5,215 

 

242 

 

(2) 

 

5,455 

U.S. Government obligations

 

50,332 

 

830 

 

-  

 

51,162 

Agency MBS - residential (2)

 

39 

 

- 

 

(5) 

 

34 

GSEs (3)

 

5,852 

 

- 

 

(155) 

 

5,697 

States and political subdivisions

 

159,421 

 

3,230 

 

(691) 

 

161,960 

Foreign government obligations

 

4,907 

 

271 

 

-  

 

5,178 

 

 

 

 

 

 

 

 

 

Total fixed maturities

$

401,307 

$

8,308 

$

(2,966) 

$

406,649 

 

(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, 2021, 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

 

$

56,936

 

$

57,614

Due after one year through five years

 

 

217,930

 

 

221,207

Due after five years through ten years

 

 

36,279

 

 

36,337

Due after ten years

 

 

66,146

 

 

65,025

Fixed maturities with no single maturity date

 

 

10,769

 

 

10,759

 

 

 

 

 

 

 

 

 

$

388,060

 

$

390,942

 


12


 

The following tables summarize, for all fixed maturities available-for-sale 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, 2021

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

51,505

 

$

614 

 

$

17,249

 

$

1,457 

 

$

68,754

$

2,071 

CMOs-residential

 

716

 

 

13 

 

 

-

 

 

- 

 

 

716

 

13 

U.S. Government obligations

 

6,655

 

 

13 

 

 

-

 

 

- 

 

 

6,655

 

13 

Agency MBS - residential

 

34

 

 

4 

 

 

-

 

 

- 

 

 

34

 

4 

GSEs

 

788

 

 

4 

 

 

4,796

 

 

164 

 

 

5,584

 

168 

States and political subdivisions

 

88,228

 

 

382 

 

 

8,620

 

 

428 

 

 

96,848

 

810 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

147,926

 

$

1,030 

 

$

30,665

 

$

2,049 

 

$

178,591

$

3,079 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

32

 

 

 

 

 

20

 

 

 

 

 

52

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

Losses

 

 

 

 

 

 

 

 

 

 

Corporate securities

$

47,369

 

$

719 

 

$

12,073

 

$

1,394 

 

$

59,442

$

2,113 

CMOs-residential

 

748

 

 

2 

 

 

-

 

 

- 

 

 

748

 

2 

Agency MBS - residential

 

34

 

 

5 

 

 

-

 

 

- 

 

 

34

 

5 

GSEs

 

-

 

 

- 

 

 

5,693

 

 

155 

 

 

5,693

 

155 

States and political subdivisions

 

35,555

 

 

254 

 

 

8,681

 

 

437 

 

 

44,236

 

691 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      unrealized loss position

$

83,706

 

$

980 

 

$

26,447

 

$

1,986 

 

$

110,153

$

2,966 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of fixed maturities in an

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  unrealized loss position

 

33

 

 

 

 

 

17

 

 

 

 

 

50

 

 

 

Substantially all of the unrealized losses on fixed maturities available-for-sale at March 31, 2021 and December 31, 2020 relate to investment grade securities. Management does not intend to sell, and it is likely that management will not be required to sell these securities prior to their anticipated recovery. The unrealized losses on the Company's fixed maturity securities are related to general market changes in interest rates, and/or the levels of credit spreads largely due to current market conditions relating to the COVID-19 pandemic rather than specific concerns with the issuer's ability to pay interest and repay principal. We have evaluated each corporate security’s credit rating as well as industry risk factors associated with the securities. The fair value of these securities is expected to recover as they approach maturity and therefore the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2021.

 


13


 

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

 

 

 

Three Months Ended

 

 

March 31,

 

 

2021

 

2020

 

 

Realized gains (losses):

 

 

 

 

  Fixed maturities available-for-sale

$

168  

$

1,070  

  Equity securities

 

882  

 

-  

 

 

 

 

 

     Total realized gains (losses) on debt and equity securities

 

1,050  

 

1,070  

Unrealized gains (losses) on equity securities

 

(835) 

 

(787) 

 

 

 

 

 

Gains (losses) on debt and equity securities

 

215  

 

283  

Gains (losses) on other investments

 

-  

 

5  

 

 

 

 

 

Net investment gains

$

215  

$

288  

 

For the three months ended March 31, 2021 and 2020, the Company realized gross gains of $216,000 and $1,091,000, respectively, and gross losses of $48,000 and $21,000, respectively, from sales, maturities and prepayments of fixed maturities available-for-sale.

 

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(v) to the Consolidated Financial Statements in the 2020 Annual Report on Form 10-K for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on fixed maturities available-for-sale.  The Company did not recognize any other-than-temporary impairments on available-for-sale securities in the first three months of 2021 or 2020.

 

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.

 


14


 

Fixed maturities available-for-sale:

 

Fixed maturities available-for-sale included in Level 2 are 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 debt securities consist of municipal tax credit strips.  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.

 

Equity securities:

 

Equity 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):

 

 

 

March 31, 2021

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

165,149 

$

- 

$

165,149 

  CMOs - residential

 

- 

 

 

5,138 

 

- 

 

5,138 

  US Government obligations

 

- 

 

 

57,622 

 

- 

 

57,622 

  Agency MBS - residential

 

- 

 

 

34 

 

- 

 

34 

  GSEs

 

- 

 

 

5,587 

 

- 

 

5,587 

  States and political subdivisions

 

- 

 

 

151,061 

 

1,285 

 

152,346 

  Foreign government obligations

 

- 

 

 

5,066 

 

- 

 

5,066 

     Total fixed maturities

 

- 

 

 

389,657 

 

1,285 

 

390,942 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

- 

 

 

- 

 

- 

 

-  

  Nonredeemable preferred stocks

 

2,671 

 

 

- 

 

- 

 

2,671 

     Total equity securities

 

2,671 

 

 

- 

 

- 

 

2,671 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

2,671 

 

$

389,657 

$

1,285 

$

393,613 

 

 

 

December 31, 2020

 

 

Level 1

 

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

Fixed maturities available-for-sale:

 

 

 

 

 

 

 

 

 

  Corporate securities

$

- 

 

$

177,163 

$

- 

$

177,163 

  CMOs - residential

 

- 

 

 

5,455 

 

- 

 

5,455 

  US Government obligations

 

- 

 

 

51,162 

 

- 

 

51,162 

  Agency MBS - residential

 

- 

 

 

34 

 

- 

 

34 

  GSEs

 

- 

 

 

5,697 

 

- 

 

5,697 

  States and political subdivisions

 

- 

 

 

160,625 

 

1,335 

 

161,960 

  Foreign government obligations

 

- 

 

 

5,178 

 

- 

 

5,178 

     Total fixed maturities

 

- 

 

 

405,314 

 

1,335 

 

406,649 

 

 

 

 

 

 

 

 

 

 

Equity securities:

 

 

 

 

 

 

 

 

 

  Common stocks

 

3,411 

 

 

- 

 

- 

 

3,411 

  Nonredeemable preferred stocks

 

2,708 

 

 

- 

 

- 

 

2,708 

     Total equity securities

 

6,119 

 

 

- 

 

- 

 

6,119 

 

 

 

 

 

 

 

 

 

 

Total Financial Assets

$

6,119 

 

$

405,314 

$

1,335 

$

412,768 


15


 

The following table presents the changes in fair value of our Level 3 financial assets for the periods indicated (in thousands):

 

 

 

Three Months Ended March 31,

 

 

2021

 

 

2020

 

 

States and

 

Total

 

 

States and

 

Total

 

 

Political

 

Level 3

 

 

Political

 

Level 3

 

 

Subdivisions

 

Assets

 

 

Subdivisions

 

Assets

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,335  

$

1,335  

 

$

1,529  

$

1,529  

 

 

 

 

 

 

 

 

 

 

Increases (decreases) recognized in earnings:

 

 

 

 

 

 

 

 

 

   Net investment gains

 

-  

 

-  

 

 

-  

 

-  

 

 

 

 

 

 

 

 

 

 

Gains (losses) included in other

 

 

 

 

 

 

 

 

 

  comprehensive income (loss):

 

 

 

 

 

 

 

 

 

    Net unrealized gains (losses)

 

(5) 

 

(5) 

 

 

(6) 

 

(6) 

 

 

 

 

 

 

 

 

 

 

Repayments and amortization of

 

 

 

 

 

 

 

 

 

   fixed maturities

 

(45) 

 

(45) 

 

 

(42) 

 

(42) 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

$

1,285  

$

1,285  

 

$

1,481  

$

1,481  

 

Included in unrealized gains (losses) on available-for-sale securities, pre-tax, on the Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2021 are $(5,000) of unrealized gains (losses) attributable to the change in unrealized gains (losses) related to Level 3 securities held at March 31, 2021.

 

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

 

 

 

March 31, 2021

 

December 31, 2020

 

 

Level 1

 

Level 2

 

 

 

Level 1

 

Level 2

 

 

 

 

Fair

 

Fair

 

Carrying

 

Fair

 

Fair

 

Carrying

 

 

Value

 

Value

 

Value

 

Value

 

Value

 

Value

 

 

 

 

 

 

FINANCIAL ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

  Short-term investments

$

1,559 

$

- 

$

1,559 

$

2,634 

$

- 

$

2,634 

  Securities purchased under

 

 

 

 

 

 

 

 

 

 

 

 

     agreements to resell

 

145,392 

 

- 

 

145,392 

 

49,990 

 

- 

 

49,990 

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

  Funds on deposit

$

- 

$

141,923 

$

141,891 

$

- 

$

141,409 

$

141,376 

  Other policyholders’ funds

 

- 

 

11,920 

 

11,920 

 

- 

 

12,001 

 

12,789 

 

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:

 

Securities purchased under agreements to resell

 

Securities purchased under agreements to resell are carried at the amounts at which the securities will be subsequently resold, which approximates fair value.

 


16


 

Short-term Investments

 

Investments with original maturities of 91 days to one year are considered short-term investments and are carried at cost, which approximates fair value.

 

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.

 

Other Policyholders’ Funds

 

Other policyholders’ funds are primarily credited with current market interest rates resulting in a fair value which approximates the carrying amount.

 

Note 6.Other Investments, Including Variable Interest Entities 

 

Equity Method Investments

 

Equity income (loss) from equity method investments for the three months ended March 31, 2021 and 2020 was $60,000 and $328,000 respectively.

 

In March 2021, the Company invested $2,500,000 for a 20% investment in Pet Assistant Holdings, LLC. an unaffiliated company centered on pet health and pet insurance that will be accounted for under the equity method. 

 

 

Variable Interest Entities

 

The Company has a minority interest in certain limited partnerships that we have determined to be Variable Interest Entities (“VIEs”).  The aforementioned VIEs are not required to be consolidated in the Company’s condensed consolidated financial statements as we are not the primary beneficiary since we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance.

 

The Company will periodically reassess whether we are the primary beneficiary in any of these investments. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $2,018,000 carrying value in these equity investments which is included in other investments in the Condensed Consolidated Balance Sheet as of March 31, 2021.

 


17


 

Related Party Transactions

 

At March 31, 2021 and December 31, 2020, the Company’s Condensed Consolidated Balance Sheets include $130,000 and $163,000, respectively, of administrative fees and other expenses payable to Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), which are included in other assets and accounts payable, accruals and other liabilities, respectively.  For the three months ended March 31, 2021, and 2020, the Company’s Condensed Consolidated Statements of Income include $401,000 and $476,000, respectively, of administrative fee expenses to Ebix Health Exchange, which are included in selling, general and administrative expenses.

 

The Condensed Consolidated Statement of Income for the three months ended March 31, 2021 and 2020 includes premiums earned of $7,156,000 and $1,097,000, respectively, and selling, general, and administrative expenses of $2,416,000 and $333,000, respectively, related to pet insurance business produced by FIGO Pet Insurance, LLC (“FIGO”). Selling, general and administrative expense for the three months ended March 31, 2020 includes approximately $1,507,000 of expense related to the purchase of leads from an affiliated lead generation company, Torchlight, which was acquired in April of 2020. Lead costs subsequent to acquisition are eliminated in consolidation. 

 

Note 7.Goodwill and Other Intangible Assets 

 

The carrying amount of goodwill is $74,900,000 at March 31, 2021 and December 31, 2020, of which $70,677,000 is attributable to the Specialty Health Segment at both March 31, 2021 and December 31, 2020, and $4,223,000 is attributable to the Group disability, life, DBL and PFL segment for the same periods.

 

The Company has net other intangible assets of $14,734,000 and $15,146,000 at March 31, 2021 and December 31, 2020, 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, 2021

 

December 31, 2020

 

 

Gross

 

 

 

Gross

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Accumulated

 

 

Amount

 

Amortization

 

Amount

 

Amortization

 

 

 

 

Finite-lived Intangible Assets:

 

 

 

 

 

 

 

 

  Agent and broker relationships

$

12,683 

$

8,521 

$

12,683 

$

8,273 

  Domain

 

1,000 

 

450 

 

1,000 

 

425 

  Software systems

 

2,930 

 

885 

 

2,930 

 

746 

     Total finite-lived

$

16,613 

$

9,856 

$

16,613 

$

9,444 

 

 

 

 

 

 

 

 

 

 


18


 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

 

 

 

2021

 

2020

Indefinite-lived Intangible Assets:

 

 

 

 

 

 

   Insurance licenses

 

 

 

 

$

7,977 

$

7,977 

     Total indefinite-lived

 

 

 

 

$

7,977 

$

7,977 

 

Amortization expense is $412,000 and $288,000 for the three months ended March 31, 2021 and 2020, respectively. 

 

Note 8.Fee Income 

 

Substantially all of the fee income recorded by the IHC Agencies and lead generation company relate to our Specialty Health segment. The following table presents fee income disaggregated by type for the periods indicated (in thousands).

 

 

 

Three Months Ended

 

 

March 31,

 

 

2021

 

 

2020

 

 

 

Commissions

$

2,877 

 

$

1,735 

Administrative Fees

 

196 

 

 

942 

Marketing Fees

 

306 

 

 

351 

Enrollment Platform Fees

 

500 

 

 

518 

Lead and Referral Fees

 

2,080 

 

 

269 

Payment Plan, Application and Other Fees

 

397 

 

 

127 

 

 

 

 

 

 

Total Fee Income

$

6,356 

 

$

3,942 

 

Commission Revenues

 

Commission revenues result from the sales of certain policies by the IHC Agencies on behalf of multiple unaffiliated insurance carriers. Increased sales of products to these unaffiliated insurance carriers began in 2020 as a result of new contracts with the carriers and increased distribution channels. These policies primarily consist of senior products, such as Medicare Advantage, Medicare Part D prescription drug plans and Medicare Supplement plans, as well as Affordable Care Act (“ACA”) plans. A significant portion of our commission revenues are recorded at a point in time upon the issuance of a policy by the unaffiliated insurance carrier based on expected constrained lifetime value (“LTV”). Constrained LTV represents expected commissions to be received over the lifetime of the policies sold. The Company analyzes various factors, such as commission rates, carrier mix, contract amendments and terminations, estimated average plan durations, cancellations and non-renewals, to estimate the LTV. Constraints are applied to help ensure that the total estimated lifetime commissions expected to be collected are recognized as revenue only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

 

We evaluate the appropriateness of our constraints on a quarterly basis and update the LTV assumptions if we observe evidence that suggests a change in the underlying long-term expectations. In doing this, we apply significant judgement in assessing historical cash collections and changes in circumstances that would impact future cash collections such as, but not limited to, commission rates, carrier mix, plan durations, plan cancellations and non-renewals. Changes in LTV result in an increase or decrease to fee income revenue and a corresponding increase or decrease to contract assets. Any significant impact due to changes in the LTV assumptions are recognized in revenue (i) in the period of the change; and (ii) to the extent we do not believe a significant reversal is probable.


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Costs to Fulfill a Contract

 

Costs to fulfill a contract include commissions owed to independent licensed agents or affinity partners that are contracted by the IHC Agencies. Upon the submission of a completed insurance application, the sales and marketing performance obligation is complete and the resultant estimated lifetime commission costs incurred are expensed and a corresponding commission liability is recorded on the Condensed Consolidated Balance Sheet. As policyholders continue their policy and remit monthly premium payments, the Company receives its commissions from the insurance carrier. Commissions owed to the agent or affinity partner are then paid and the corresponding liability is reduced. Judgement is required to estimate total expected lifetime commissions based on policy duration assumptions. At March 31, 2021 and December 31, 2020, the aforementioned commission liability was $2,514,000 and $2,362,000, respectively, and is included in accounts payable, accruals and other liabilities on the Condensed Consolidated Balance Sheet.

 

Contract Asset

 

Contract assets primarily relate to our commission revenues for the sales of senior products, such as Medicare Advantage and Medicare Supplement plans and ACA plans, which began in 2020. When commission revenue for the sales of these products is recognized, a corresponding contract asset is recorded in other assets on the Condensed Consolidated Balance Sheet. The timing of revenue differs from the collection of commissions. As policyholders continue their policy and remit monthly premium payments, the Company receives its commissions from the insurance carrier and the contract asset is reduced.

 

The following table summarizes the contract asset activity for the period indicated (in thousands).

 

 

 

Three Months Ended

 

 

March 31, 2021

 

Beginning Balance

$

7,847  

Commissions recognized during the period

 

2,265  

Commission adjustments related to prior periods

 

612  

Cash receipts

 

(1,691) 

 

 

 

Ending Balance

$

9,033  

 

 

Remaining Performance Obligations

 

Deferred revenues are recorded in connection with certain terminable contracts, the right to use our INSX enrollment platform and administrative contracts for a block of pet insurance that is in run-off. At March 31, 2021 and December 31, 2020, deferred revenues are immaterial and expected to be fully recognized within the next 12 months.

 

 

Note 9.Income Taxes 

 

The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed by applying the effective tax rate expected to be applicable for the reporting periods. Differences between the Federal statutory income tax rate and the Company’s effective income tax rate are principally from the dividends received deduction and tax-exempt interest income, state and local income taxes, and compensation related tax provisions.

 

At December 31, 2020, the Company’s wholly owned subsidiary, AMIC Holdings, Inc. (“AMIC”) and its subsidiaries, had Federal net operating loss carryforwards of approximately $46,669,000 that primarily


20


expire in June 2021, and are limited in their utilization to future taxable income earned on a separate company basis. At December 31, 2020, AMIC’s valuation allowance was $8,281,000 and is related to net operating loss carryforwards that, in the judgment of management, are not considered realizable. No change in the valuation allowance was necessary in the three months ended March 31, 2021.

 

On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act.  The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of net operating losses ("NOLs") generated in 2018, 2019 and 2020; (2) accelerated refund of alternative minimum tax (AMT) credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property. At this time, the legislation does not have a material impact on the Company due to the lack of taxable losses in the stated carryback eligible tax years and the fact that the Company was already expecting to receive a cash benefit for the remaining AMT credits in the fiscal 2018 tax year return.

 

The New York State Department of Taxation and Finance has selected the Company’s 2015 and 2016 NYS returns for audit.

 

Note 10.Policy Benefits and Claims 

 

Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated incurred but not reported (“IBNR”) reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands). Amounts incurred below do not include expenses for policy benefits and costs incurred for the Company’s life, annuity and other long-duration contracts. In addition, certain loss adjustment expenses related to short-duration contracts that are included in amounts incurred below are classified as selling general and administrative expenses on the Condensed Consolidated Statements of Income.

 

 

 

Three Months Ended March 31, 2021

 

 

Specialty

 

DBL and

 

Group

 

All Other

 

 

 

 

Health

 

PFL

 

Disability

 

Lines

 

Total

 

 

 

 

 

Balance at beginning of year

$

43,455  

$

35,249  

$

80,976  

$

19,552  

$

179,232  

Less: reinsurance recoverable

 

1,776  

 

430  

 

22,472  

 

11,448  

 

36,126  

Net balance at beginning of year

 

41,679  

 

34,819  

 

58,504  

 

8,104  

 

143,106  

 

 

 

 

 

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

 

 

 

 

 

  Current year

 

26,461  

 

31,183  

 

9,449  

 

6,142  

 

73,235  

  Prior years

 

(2,612) 

 

(1,618) 

 

(1,312) 

 

(332) 

 

(5,874) 

 

 

 

 

 

 

 

 

 

 

 

  Total incurred

 

23,849  

 

29,565  

 

8,137  

 

5,810  

 

67,361  

 

 

 

 

 

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

 

 

 

 

 

  Current year

 

8,276  

 

7,793  

 

931  

 

2,340  

 

19,340  

  Prior years

 

18,071  

 

6,413  

 

6,675  

 

3,246  

 

34,405  

 

 

 

 

 

 

 

 

 

 

 

  Total paid

 

26,347  

 

14,206  

 

7,606  

 

5,586  

 

53,745  

 

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

39,181  

 

50,178  

 

59,035  

 

8,328  

 

156,722  

Plus:  reinsurance recoverable

 

1,410  

 

525  

 

22,615  

 

12,010  

 

36,560  

Balance at end of period

$

40,591  

$

50,703  

$

81,650  

$

20,338  

$

193,282  

 


21


 

 

 

 

Three Months Ended March 31, 2020

 

 

Specialty

 

DBL and

 

Group

 

All Other

 

 

 

 

Health

 

PFL

 

Disability

 

Lines

 

Total

 

 

 

 

 

Balance at beginning of year

$

42,228  

$

23,438  

$

80,079  

$

19,057  

$

164,802  

Less: reinsurance recoverable

 

1,717  

 

664  

 

23,322  

 

11,290  

 

36,993  

Net balance at beginning of year

 

40,511  

 

22,774  

 

56,757  

 

7,767  

 

127,809  

 

 

 

 

 

 

 

 

 

 

 

Amount incurred, related to:

 

 

 

 

 

 

 

 

 

 

  Current year

 

23,353  

 

22,302  

 

8,784  

 

6,720  

 

61,159  

  Prior years

 

(2,057) 

 

(3,949) 

 

1,327  

 

(2,444) 

 

(7,123) 

 

 

 

 

 

 

 

 

 

 

 

  Total incurred

 

21,296  

 

18,353  

 

10,111  

 

4,276  

 

54,036  

 

 

 

 

 

 

 

 

 

 

 

Amount paid, related to:

 

 

 

 

 

 

 

 

 

 

  Current year

 

4,609  

 

6,973  

 

1,184  

 

1,402  

 

14,168  

  Prior years

 

17,508  

 

6,845  

 

7,125  

 

2,203  

 

33,681  

 

 

 

 

 

 

 

 

 

 

 

  Total paid

 

22,117  

 

13,818  

 

8,309  

 

3,605  

 

47,849  

 

 

 

 

 

 

 

 

 

 

 

Net balance at end of period

 

39,690  

 

27,309  

 

58,559  

 

8,438  

 

133,996  

Plus:  reinsurance recoverable

 

1,670  

 

652  

 

23,560  

 

10,958  

 

36,840  

Balance at end of period

$

41,360  

$

27,961  

$

82,119  

$

19,396  

$

170,836  

 

 

Since unpaid loss and loss adjustment expenses are estimates, actual losses incurred may be more or less than the Company’s previously developed estimates and is referred to as either unfavorable or favorable development, respectively.

 

Net favorable (unfavorable) development in the Specialty Health segment, as depicted in the tables above, is comprised of the following lines of business for the years indicated (in thousands):

 

 

 

Three Months Ended

 

 

March 31,

Specialty Health segment:

 

2021

 

2020

Short-term Medical

$

195  

$

259 

Occupational Accident

 

454  

 

262 

Fixed Indemnity Limited Benefit

 

464  

 

244 

Limited Medical

 

120  

 

227 

Critical Illness

 

88  

 

232 

Group Gap

 

239  

 

407 

Pet

 

807  

 

198 

All other specialty health lines

 

245  

 

228 

 

 

 

 

 

    Total Specialty Health segment

$

2,612  

$

2,057 

 

In both 2021 and 2020, net favorable development in the various lines of the Specialty Health segment shown above are primarily due to better than expected claim development.

 

The net favorable development in the New York short-term disability (“DBL”) and paid family leave rider (“PFL”) business in 2021 of $1,618,000 is primarily due to better than expected DBL claim experience. The favorable development in 2020 of $3,949,000 was primarily due to both favorable adjustments to prior


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