CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
Independence Holding Company ("IHC") and its subsidiaries (collectively, the
"Company") should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company and the
related Notes thereto appearing in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2019, as filed with the Securities and Exchange
Commission, and our unaudited Condensed Consolidated Financial Statements and
related Notes thereto appearing elsewhere in this quarterly report.
Overview
Independence Holding Company, a Delaware corporation, 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, Madison National Life, and Independence American; and
(ii) its marketing and administrative companies, including IHC Specialty
Benefits Inc., Independence Brokerage Group, Inc., My1HR, Torchlight, and a
majority interest in PetPartners. 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".
While management considers a wide range of factors in its strategic planning and
decision-making, underwriting profit is consistently emphasized as the primary
goal in all decisions as to whether or not to increase our retention in a core
line, expand into new products, acquire an entity or a block of business, or
otherwise change our business model. Management's assessment of trends in
healthcare and morbidity, with respect to specialty health, disability, New York
short-term disability ("DBL") and Paid Family Leave ("PFL"), mortality rates
with respect to life insurance, and changes in market conditions in general play
a significant role in determining the rates charged, deductibles and attachment
points quoted, and the percentage of business retained. IHC also seeks
transactions that permit it to leverage its vertically integrated organizational
structure by generating fee income from production and administrative operating
companies as well as risk income for its carriers. Management has always
focused on managing the costs of its operations.
COVID-19
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. The business continuity
and emergency response plans we implemented in March 2020 continue to ensure we
provide a high level of service to our customers and support our everyday
business needs. To help protect the safety and wellbeing of our employees and
mitigate the spread of COVID-19, we have limited travel and directed our
employees to work remotely whenever possible. As the COVID-19 outbreak continues
to evolve, 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. For more information, see the risk factor
under the heading "We face risks related to health epidemics, like the
Coronavirus (COVID-19) that could impact our sales, operating results and
financial condition" in Item 1A. Risk Factors in this Quarterly Report on Form
10-Q.
--------------------------------------------------------------------------------
32
--------------------------------------------------------------------------------
The following is a summary of key performance information and events:
Results of operations are summarized as follows for the periods indicated (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenues $ 113,220 $ 95,165 $ 324,522 $ 284,469
Expenses 102,511 85,746 307,711 256,010
Income before income taxes 10,709 9,419 16,811 28,459
Income taxes 1,977 3,248 3,219 6,482
Net income 8,732 6,171 13,592 21,977
(Income) from noncontrolling interests (44) (29) (205) (261)
Net income attributable to IHC $ 8,688 $ 6,142 $ 13,387 $ 21,716
·Income from operations of $.59 per share, diluted, for the three months ended
September 30, 2020 compared to $.41 per share, diluted, for the same period in
2019. Income from operations of $.90 per share, diluted, for the nine months
ended September 30, 2020 compared to $1.45 per share, diluted for the same
period in 2019.
oNet income for the three and nine months ended September 30, 2020 includes the
recognition of an Arbitration Award with a former TPA (as described in Note 13)
amounting to $3.7 million, net of associated legal expenses and income taxes.
Net income for the nine months ended September 30, 2020 also includes $3.7
million of expenses, net of taxes, for compliance with the MCE related to our
STM, limited medical and fixed indemnity limited benefit health insurance
products for the period of January 1, 2014 through September 30, 2017, also
discussed in Note 13.
oNet income for the nine months ended September 30, 2019 includes a $2.6 million
gain, net of tax, related to the sale of an equity investment. Results for the
three months and nine months of 2019 also include additional tax expense of $1.6
million associated with the reduction of estimated tax benefits from the
expected utilization of AMIC's net operating loss carryforwards.
·Consolidated investment yields (on an annualized basis) of 2.2% and 2.4% for
the three and nine months ended September 30, 2020, respectively, compared to
3.1% for the three and nine month periods in 2019.
·Book value of $31.90 per common share at September 30, 2020 compared to $30.92
at December 31, 2019.
·Results for the first nine months of 2020 were not materially impacted by
COVID-19 although sales of Short Term Medical ("STM") might have grown more if
not for displaced workers taking advantage of Special Enrollment Periods for
Affordable Care Act ("ACA") coverage, and the subsidies provided through
Advanced Premium Tax Credits, as well as employers continuing to offer employer
sponsored coverage to furloughed workers. Evolving regulatory mandates for
testing and treatment coverage, the length and severity of the outbreak, claims
activity, and impacts on payment of premiums have not
--------------------------------------------------------------------------------
33
--------------------------------------------------------------------------------
had a significant impact on the 2020 results to date, however, we may incur
additional expenses for the balance of the year relating to possible COVID-19
related claims activity and possible non-payment of premiums as the full effects
of the outbreak continue to unfold.
The following is a summary of key performance information by segment:
·The Specialty Health segment reported income before taxes of $4.9 million for
the three months ended September 30, 2020 as compared to $1.1 million for the
comparable period in 2019; and reported $1.2 million in income before taxes for
the nine-month period ended September 30, 2020 compared to $13.6 million for the
same period in 2019. The increase in the third quarter of 2020 compared to 2019
is primarily due to the recognition of a $4.6 million arbitration award
received, net of legal expenses. The decrease in the first nine months of 2020
when compared to 2019 is primarily due to: (i) $3.7 million of expenses accrued
for compliance with the MCE; (ii) shift in product mix in 2020 to higher earned
premium from somewhat higher loss ratio products than those impacting 2019;
(iii) increased costs related to overall infrastructure improvements in lead
generation capabilities and sales automation platforms at IHC Specialty
Benefits, Inc. with no meaningful increase in sales yet, and (iv) results for
the comparable period in 2019 include a pre-tax gain of $3.6 million on the sale
of an equity method investment;
oPremiums earned increased $4.7 million and $6.2 million for the three and nine
months ended September 30, 2020, respectively, compared to the same periods in
2019. Increases in premiums from the pet and STM lines were partially offset by
decreases in premiums from fixed indemnity limited benefit, occupational
accident and group gap business.
oUnderwriting experience, as indicated by its U.S. GAAP Combined Ratios, for the
Specialty Health segment are as follows for the periods indicated (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Premiums Earned $ 49,209 $ 44,462 $ 139,664 $ 133,467
Insurance Benefits, Claims & Reserves 20,295 19,585 62,552 56,334
Expenses 24,910 20,972 71,996 62,424
Loss Ratio (A) 41.2% 44.0% 44.8% 42.2%
Expense Ratio (B) 50.6% 47.2% 51.5% 46.8%
Combined Ratio (C) 91.8% 91.2% 96.3% 89.0%
(A)Loss ratio represents insurance benefits, claims and reserves divided by
premiums earned.
(B)Expense ratio represents commissions, administrative fees, premium taxes and
other underwriting expenses divided by premiums earned.
(C)The combined ratio is equal to the sum of the loss ratio and the expense
ratio.
oThe higher loss ratio in the first nine months of 2020 primarily reflects the
broadening of the mix of business, with a higher concentration of more stable
product lines with lower profit margins. The higher expense ratio in the first
nine months of 2020 is primarily due to $3.7 million of expenses accrued for
compliance with the MCE as well as changes in the mix of products in the
Specialty Health segment. Excluding the expenses accrued in connection with
--------------------------------------------------------------------------------
34
--------------------------------------------------------------------------------
the MCE, the combined ratio would have been 93.7% for the nine months ended
September 30, 2020.
·Income before taxes from the Group disability, life, DBL and PFL segment was
$8.8 million and $21.6 million for the three months and nine months ended
September 30, 2020, respectively, compared to $10.0 million and $19.2 million
for the same periods in 2019, respectively. The increase in the first nine
months results primarily reflects an increase in PFL profitability due to
increased premium rates and favorable premium reserve adjustments in DBL, which
were partially offset by higher loss ratios and unfavorable loss development in
the Group STD line of business and, beginning in third quarter 2020, a decrease
in DBL business as a result of higher unemployment due to COVID-19;
·The Individual life, annuities and other segment in run-off reported losses
before income taxes of $.2 million and $.5 million for the three months and nine
months ended September 30, 2020, respectively, compared with losses of $.6
million and $1.1 million for the three months and the nine months ended
September 30, 2019 respectively;
·The Corporate segment reported losses before taxes of $2.9 million and $6.4
million for the three and nine months ended September 30, 2020, respectively,
compared with losses of $2.0 million in the three months and $5.1 million in the
nine months ended 2019. Results for 2019 include higher amounts of partnership
income compared to 2020; and
·Premiums by principal product for the periods indicated are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
Gross Direct and Assumed
Earned Premiums: 2020 2019 2020 2019
Specialty Health $ 51,201 $ 46,203 $ 144,974 $ 137,476
Group disability, life, DBL and PFL 57,175 49,073 174,004 142,217
Individual life, annuities and other 4,894 4,862 14,524 15,984
$ 113,270 $ 100,138 $ 333,502 $ 295,677
Three Months Ended Nine Months Ended
September 30, September 30,
Net Direct and Assumed
Earned Premiums: 2020 2019 2020 2019
Specialty Health $ 49,209 $ 44,462 $ 139,664 $ 133,467
Group disability, life, DBL and PFL 50,908 41,977 155,173 120,683
Individual life, annuities and other 7
14 28 39
$ 100,124 $ 86,453 $ 294,865 $ 254,189
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to U.S. generally
accepted accounting principles ("GAAP"). The preparation of the Condensed
Consolidated Financial Statements in conformity with U.S. GAAP requires the
Company's management to make estimates and assumptions that affect the amounts
--------------------------------------------------------------------------------
35
--------------------------------------------------------------------------------
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. A summary of the Company's significant
accounting policies and practices is provided in Note 1 of the Notes to the
Consolidated Financial Statements included in Item 8 of the Annual Report on
Form 10-K for the fiscal year ended December 31, 2019. Management has identified
the accounting policies related to Insurance Premium Revenue Recognition and
Policy Charges, Insurance Liabilities, Investments, Goodwill and Other
Intangible Assets, and Deferred Income Taxes as those that, due to the
judgments, estimates and assumptions inherent in those policies, are critical to
an understanding of the Company's Consolidated Financial Statements and this
Management's Discussion and Analysis. A full discussion of these policies is
included under the heading, "Critical Accounting Policies" in Item 7 of the
Annual Report on Form 10-K for the fiscal year ended December 31, 2019. During
the nine months ended September 30, 2020, there were no additions to or changes
in the critical accounting policies disclosed in the 2019 Form 10-K except for
the recently adopted accounting standards discussed in Note 1(F) of the Notes to
Condensed Consolidated Financial Statements.
Results of Operations for the Three Months Ended September 30, 2020 Compared to
the Three Months Ended September 30, 2019
Information by business segment for the periods indicated is as follows:
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2020
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 49,209 609 10,251 20,295 34,877 $ 4,897
Group disability,
life, DBL and 50,908 1,713 107 29,380 14,562 8,786
PFL
Individual life,
annuities and 7 281 214 152 534 (184)
other
Corporate - 190 (339) - 2,711 (2,860)
Sub total $ 100,124 $ 2,793 $ 10,233 $ 49,827 $ 52,684 10,639
Net investment gains 70
Income before income taxes 10,709
Income taxes 1,977
Net Income $ 8,732
Benefits, Selling,
Net Fee and Claims General
September 30, 2019 Premiums Investment Other and and
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 44,462 1,132 2,643 19,585 27,525 $ 1,127
Group disability,
life, DBL and PFL 41,977 1,928 120 21,396 12,644 9,985
Individual life,
annuities and 14 369 76 417 682 (640)
other
Corporate - 535 979 - 3,497 (1,983)
Sub total $ 86,453 $ 3,964 $ 3,818 $ 41,398 $ 44,348 8,489
Net investment gains 930
Income before income taxes 9,419
Income taxes 3,248
Net Income $ 6,171
Premiums Earned
In the third quarter of 2020, premiums earned increased $13.6 million over the
comparable period in 2019. The increase is primarily due to: (i) an $8.9 million
increase in earned premiums from the Group disability, life, DBL and PFL segment
primarily as a result of a $7.4 million increase in PFL premiums due to an
increase in rates, a $1.1 million increase in group term life business due to
increased retentions, a $.9 million increase in the STD/LTD lines primarily due
to higher LTD premium volume, $.7 million in new premiums
--------------------------------------------------------------------------------
36
--------------------------------------------------------------------------------
in other group life business, partially offset by a $1.2 million decrease in DBL
premiums as a result of higher unemployment due to COVID-19; and (ii) $4.7
million in increased premiums in the Specialty Health segment primarily due to
$10.9 million increase in earned premiums from the pet line; partially offset by
decreases of $5.2 million in the fixed indemnity limited benefit line, $.7
million in group gap and $.3 million in the group health modified indemnity
line.
Net Investment Income
Total net investment income decreased $1.2 million. The overall annualized
investment yields were 2.2% and 3.1% in the third quarter of 2020 and 2019,
respectively.
Net Investment Gains
The Company had net investment gains of $.1 million in the third quarter of 2020
compared to $.9 million in 2019. These amounts include gains and losses from
sales of fixed maturities available-for-sale, equity securities and other
investments. Decisions to sell securities are based on management's ongoing
evaluation of investment opportunities and economic and market conditions, thus
creating fluctuations in gains and losses from period to period.
Fee Income and Other Income
Fee income increased $.9 million for the three-month period ended September 30,
2020 compared to the three-month period ended September 30, 2019.
Other income increased $5.5 million for the three months ended September 30,
2020 from the comparable period in 2019. In the third quarter of 2020, other
income includes the recognition of a $5.6 million arbitration award received
with no comparable amount in 2019.
Insurance Benefits, Claims and Reserves
In the third quarter of 2020, insurance benefits, claims and reserves increased
$8.4 million over the comparable period in 2019. The increase is primarily
attributable to: (i) an increase of $8.0 million in benefits, claims and
reserves in the Group disability, life, DBL and PFL segment primarily as a
result of a $4.7 million increase in PFL benefits to policyholders (including a
$5.5 million increase in the accrual for a potential risk adjustment payment
associated with the New York State Department of Financial Services risk
adjustment program), a $1.3 million increase in group term life due to higher
loss ratios and a $1.3 million increase in the STD/LTD line primarily due to an
increase in STD claims; and (ii) an increase of $.7 million in the Specialty
Health segment primarily due to an increase of $4.5 million in pet claims on
higher premium volume; partially offset by decreases of $1.3 million in the
group gap line on lower loss ratios as well as favorable prior year loss
development, $.3 million in group health modified indemnity reserves on lower
premium, $.6 million in lower claims on dental business, $.6 million decrease in
STM line due to lower loss ratios and a $1.2 million decrease in the fixed
indemnity limited benefit line due to lower premium volume.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $8.4 million over
the comparable period in 2019. The increase is principally due to: (i) an
increase of $7.4 million in the Specialty Health segment primarily due to $3.7
million of expenses accrued for compliance with the MCE related to our STM,
limited benefit and fixed indemnity limited benefit products, as well as other
increases in commissions, administrative fees and other general expenses in the
STM and pet lines of business from increased premium volume, in addition
increased lead generation expenses, compensation and system development related
expenses in our marketing and administrative companies, partially offset by
decreases in commission and administrative expenses related to decreased volume
in the fixed indemnity limited benefit line; and (ii) an increase of $2.0
million in the Group disability, life, DBL and PFL segment primarily due to
increased commission expenses
--------------------------------------------------------------------------------
37
--------------------------------------------------------------------------------
and other general expenses on PFL, group term life and LTD lines of business all
due to increased premium volume.
Income Taxes
The effective tax rate for the three months ended September 30, 2020 was 18.5%
compared to 34.5% for the three months ended 2019. The effective rate for the
third quarter of 2020 was reduced by state and local tax benefits associated
with non-insurance operations. The high effective rate in 2019 is primarily due
to tax provisions associated with the reduction of estimated tax benefits from
the expected utilization of AMIC's net operating loss carryforwards. A
significant portion of these net operating loss carryforwards expired in 2020.
Results of Operations for the Nine Months Ended September 30, 2020 Compared to
the Nine Months Ended September 30, 2019
Information by business segment for the periods indicated is as follows:
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2020
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 139,664 2,098 18,492 62,552 96,529 $ 1,173
Group disability,
life, DBL and 155,173 5,402 395 95,474 43,927 21,569
PFL
Individual life,
annuities and 28 692 590 448 1,328 (466)
other
Corporate - 980 75 - 7,453 (6,398)
Sub total $ 294,865 $ 9,172 $ 19,552 $ 158,474 $ 149,237 15,878
Net investment gains 933
Income before income taxes 16,811
Income taxes 3,219
Net Income $ 13,592
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2019
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 133,467 3,116 12,836 56,334 79,477 $ 13,608
Group disability,
life, DBL and 120,683 5,958 427 71,664 36,217 19,187
PFL
Individual life,
annuities and 39 1,008 238 929 1,478 (1,122)
other
Corporate - 2,012 2,775 - 9,911 (5,124)
Sub total $ 254,189 $ 12,094 $ 16,276 $ 128,927 $ 127,083 26,549
Net investment gains 2,556
Net impairment losses recognized in earnings (646)
Income before income taxes 28,459
Income taxes 6,482
Net Income $ 21,977
--------------------------------------------------------------------------------
38
--------------------------------------------------------------------------------
Premiums Earned
In the first nine months of 2020, premiums earned increased $40.7 million over
the comparable period in 2019. The increase is primarily due to: (i) a $34.5
million increase in earned premiums from the Group disability, life, DBL and PFL
segment primarily as a result of a $27.0 million increase in PFL premiums due to
an increase in rates, a $3.2 million increase in group term life business due to
increased retentions, a $4.0 million increase in the STD/LTD lines due to new
STD business and increased LTD premium volume, $1.8 million in new premiums in
other group life business, partially offset by a $1.5 million decrease in DBL
premiums as a result of higher unemployment due to COVID-19; as well as (ii) an
increase of $6.2 million in the Specialty Health segment primarily due to
increases in earned premiums from the pet and STM lines of $23.1 million and
$3.8 million, respectively; partially offset by decreases of $17.5 million in
the fixed indemnity limited benefit line, $1.4 million in group gap, $.9 million
in occupational accident business and $.7 million in the group health modified
indemnity line.
Net Investment Income
Total net investment income decreased $2.9 million. The overall annualized
investment yields were 2.4% and 3.1% in the first nine months of 2020 and 2019,
respectively.
Net Investment Gains and Net Impairment Losses Recognized in Earnings
The Company had net investment gains of $.9 million in 2020 compared to $2.6
million in 2019. These amounts include gains and losses from sales of fixed
maturities available-for-sale, equity securities and other investments.
Decisions to sell securities are based on management's ongoing evaluation of
investment opportunities and economic and market conditions, thus creating
fluctuations in gains and losses from period to period.
In 2020, the Company did not recognize any other-than-temporary impairment
losses on fixed maturities available-for-sale. In the first nine months of 2019,
the Company recognized $.6 million of other-than-temporary impairment losses on
fixed maturities available-for-sale as the Company determined that it was more
likely than not that we would sell the securities before the recovery of their
amortized cost basis.
Fee Income and Other Income
Fee income increased $1.2 million for the nine-month period ended September 30,
2020 compared to the nine-month period ended September 30, 2019.
Other income increased $2.1 million for the nine months ended September 30, 2020
from the comparable period in 2019. In 2020, other income includes the
recognition of a $5.6 million arbitration award received in the third quarter.
Other income in 2019 includes a $3.6 million pretax gain recognized on the sale
of an equity investment.
Insurance Benefits, Claims and Reserves
In the first nine months of 2020, insurance benefits, claims and reserves
increased $29.6 million over the comparable period in 2019. The increase is
principally attributable to: (i) an increase of $23.8 million in benefits,
claims and reserves in the Group disability, life, DBL and PFL segment primarily
as a result of a $19.6 million increase in PFL benefits to policyholders on
increased premiums (including a $14.2 million increase in the accrual for a
potential risk adjustment payment associated with the New York State Department
of Financial Services risk adjustment program), a $6.3 million increase in
benefits and claims as a result of new STD business, partially offset by $1.6
million in decreased claims on lower loss ratios in the LTD line, and $2.7
million in reductions on DBL reserves primarily due to lower premium volume and
premium refund reserve adjustments; and (ii) an increase of $6.3 million in the
Specialty Health segment primarily due to increases of $11.0 million and $1.0
million in pet and STM claims, respectively, on higher premium volume;
--------------------------------------------------------------------------------
39
--------------------------------------------------------------------------------
partially offset by decreases of $2.7 million in group gap on lower loss ratios
and favorable prior year loss development, $2.1 million in the fixed indemnity
limited benefit line due to lower premium volume partially offset by higher loss
ratios and a $.9 million unfavorable change in prior year loss development, and
$.7 million in the group health modified indemnity business which is in runoff.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased $22.1 million over
the comparable period in 2019. The increase is principally due to: (i) an
increase of $17.0 million in the Specialty Health line of business primarily due
to the $3.7 million of expenses accrued for compliance with the MCE related to
our STM, limited benefit and fixed indemnity limited benefit products as well
increases in commissions, administrative fees and other general expenses in the
STM and pet lines of business from increased premium volume, in addition
increased lead generation expenses, compensation and system development related
expenses in our marketing and administrative companies, partially offset by
decreases in commission and administrative expenses related to decreased volume
in the fixed indemnity limited benefit line; and (ii) an increase of $7.7
million in the Group disability, life, DBL and PFL segment primarily due to
increased commission expenses and other general expenses on PFL, group term life
and STD/LTD lines of business on increased premium volume; partially offset by
(iii) a decrease of $2.5 million in the Corporate segment primarily due to
compensation related expenses.
Income Taxes
The effective tax rate for the nine months ended September 30, 2020 was 19.1%
compared to 22.8% for the nine months ended 2019. The effective rate for 2020
was reduced by state and local income taxes associated with non-insurance
operations and the benefit of capital losses attributable to the sale of a
subsidiary in 2020, partially offset by the non-deductibility of certain
expenses recorded in connection with the RSA on the MCE discussed in Note 13.
The higher effective rate in 2019 is primarily due to tax provisions associated
with the reduction of estimated tax benefits from the expected utilization of
AMIC's net operating loss carryforwards partially offset by the positive impact
of tax benefits associated with exercises of sharebased compensation. A
significant portion of these net operating loss carryforwards expired in 2020.
LIQUIDITY
Insurance Group
The Insurance Group normally provides cash flow from: (i) operations; (ii) the
receipt of scheduled principal payments on its portfolio of fixed maturities;
and (iii) earnings on investments. Such cash flow is partially used to fund
liabilities for insurance policy benefits. These liabilities represent long-term
and short-term obligations.
Corporate
Corporate derives its funds principally from: (i) dividends from the Insurance
Group; (ii) management fees from its subsidiaries; and (iii) investment income
from Corporate liquidity. Regulatory constraints historically have not affected
the Company's consolidated liquidity, although state insurance laws have
provisions relating to the ability of the parent company to use cash generated
by the Insurance Group. The Insurance Group declared and paid $5.2 million and
$0 dividends during the nine months ended September 30, 2020 and 2019,
respectively.
Cash Flows
The Company had $24.1 million and $24.6 million, respectively, of cash, cash
equivalents and restricted cash as of September 30, 2020 and December 31, 2019.
--------------------------------------------------------------------------------
40
--------------------------------------------------------------------------------
For the nine months ended September 30, 2020, operating activities provided
$37.8 million of cash, investment activities utilized $24.9 million of cash,
primarily for net purchases of investment securities and $13.7 million utilized
for business acquisitions. Financing activities utilized $13.5 million of cash,
of which $6.9 million was utilized for treasury stock purchases and $6.2 million
for dividend payments.
On April 24, 2020, IHC commenced a tender offer to purchase up to 1 million
shares of its common stock at a price per share of $27.00, net, to the seller in
cash. On May 21, 2020, at the close of business, the offer expired and the
Company accepted for purchase 36,377 shares of its common stock at $27.00 per
share, for an aggregate purchase price of $1.0 million. The tender offer was
fully funded through corporate liquidity.
The Company had $373.3 million of liabilities for future policy benefits and
policy benefits and claims as of September 30, 2020 that it expects to
ultimately pay out of current assets and cash flows from future business. If
necessary, the Company could utilize the cash received from maturities and
repayments of its fixed maturity investments if the timing of claim payments
associated with the Company's insurance resources does not coincide with future
cash flows. For the nine months ended September 30, 2020, cash received from the
maturities and other repayments of fixed maturities was $97.0 million.
The Company believes it has sufficient cash to meet its currently anticipated
business requirements over the next twelve months including working capital
requirements and capital investments.
There were no material negative impacts on the Company's cash flows or liquidity
with regards to COVID-19 during the first nine months of 2020. Depending on the
length and severity of the outbreak, it is possible that cash flows may be
negatively impacted due to increased claim activity as a result of mandated
testing and treatment coverage, as well as delayed policy payments or an
increase in cancelled policies due to non- payment in the remainder of 2020.
BALANCE SHEET
The Company had receivables due from reinsurers of $357.6 million at September
30, 2020 compared to $363.0 million at December 31, 2019. All of such
reinsurance receivables are from highly rated companies or are adequately
secured. No allowance for doubtful accounts was necessary at September 30, 2020.
The Company's liability for policy benefits and claims by segment are as follows
(in thousands):
Policy Benefits and Claims
September 30, December 31,
2020 2019
Specialty Health $ 38,879 $ 42,228
Group Disability 120,109 112,623
Individual A&H and Other 15,126 9,951
$ 174,114 $ 164,802
For the Specialty Health business, incurred but not reported ("IBNR") claims
liabilities plus expected development on reported claims are calculated using
standard actuarial methods and practices. The "primary" assumption in the
determination of Specialty Health reserves is that historical Claim Development
Patterns are representative of future Claim Development Patterns. Factors that
may affect this assumption include changes in claim payment processing times and
procedures, changes in time delay in submission of claims, and the incidence of
unusually large claims. Liabilities for policy benefits and claims for specialty
health medical and disability coverage are computed using completion factors and
expected Net Loss Ratios derived from actual historical premium and claim data.
The reserving analysis includes a review of claim processing statistical
measures and large claim early notifications; the potential impacts of any
changes in these factors are not material. The Company has business that is
serviced by third-party administrators. From time to time, there
--------------------------------------------------------------------------------
41
--------------------------------------------------------------------------------
are changes in the timing of claims processing due to any number of factors
including, but not limited to, system conversions and staffing changes during
the year. These changes are monitored by the Company and the effects of these
changes are taken into consideration during the claim reserving process. Other
than these considerations, there have been no significant changes to
methodologies and assumptions from the prior year.
While these calculations are based on standard methodologies, they are estimates
based on historical patterns. To the extent that actual claim payment patterns
differ from historical patterns, such estimated reserves may be redundant or
inadequate. The effects of such deviations are evaluated by considering claim
backlog statistics and reviewing the reasonableness of projected claim ratios.
Other factors which may affect the accuracy of policy benefits and claim
estimates include the proportion of large claims which may take longer to
adjudicate, changes in billing patterns by providers and changes in claim
management practices such as hospital bill audits.
Since our analysis considered a variety of outcomes related to these factors,
the Company does not believe that any reasonably likely change in these factors
will have a Material Effect.
The Company's disability business is comprised of group disability and DBL. The
two "primary" assumptions on which disability policy benefits and claims are
based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels
increase, for example due to an epidemic or a recessionary environment, the
Company would increase reserves because there would be more new claims than
expected. In regard to the assumed recovery rate, if disabled lives recover
more quickly than anticipated then the existing claims reserves would be
reduced; if less quickly, the existing claims reserves would be increased.
Advancements in medical treatments could affect future recovery, termination,
and mortality rates.
The $7.5 million increase in IHC's stockholders' equity in the first nine months
of 2020 is primarily due to $13.4 million of net income attributable to IHC and
$2.7 million of other comprehensive income attributable to IHC partially offset
by $7.1 million of treasury stock purchases and $3.2 million of common stock
dividends.
Asset Quality and Investment Impairments
The nature and quality of insurance company investments must comply with all
applicable statutes and regulations, which have been promulgated primarily for
the protection of policyholders. The Company has gross unrealized gains of $8.8
million and gross unrealized losses of $3.8 million on its fixed maturities
available-for-sale securities at September 30, 2020. All of the Company's fixed
maturities were investment grade and continue to be rated on average AA. The
Company marks all of its fixed maturities available-for-sale to fair value
through accumulated other comprehensive income or loss. These investments tend
to carry less default risk and, therefore, lower interest rates than other types
of fixed maturity investments. The Company did not have any non-performing fixed
maturities at September 30, 2020.
The Company reviews its investments regularly and monitors its investments
continually for impairments. The Company did not record any other-than-temporary
impairment losses in the nine months ended September 30, 2020. The Company
recognized $.6 million of other-than-temporary impairment losses on certain
fixed maturities available for sale during the nine months ended September 30,
2019, as the Company determined that it was more likely than not that the
company would sell the securities before the recovery of their amortized cost
basis.
--------------------------------------------------------------------------------
42
--------------------------------------------------------------------------------
The following table summarizes the carrying value of securities with fair values
less than 80% of their amortized cost at September 30, 2020 by the length of
time the fair values of those securities were below 80% of their amortized cost
(in thousands):
Greater than Greater than
3 months, 6 months,
Less than less than less than Greater than
3 months 6 months 12 months 12 months Total
Fixed maturities $ - $ - $ 1,503 $ - $ 1,503
The unrealized losses on fixed maturities available-for-sale were evaluated in
accordance with the Company's impairment policy and were determined to be
temporary in nature at September 30, 2020. From time to time, as warranted, the
Company may employ investment strategies to mitigate interest rate and other
market exposures. Further deterioration in credit quality of the companies
backing the securities, further deterioration in the condition of the financial
services industry, imbalances in liquidity that exist in the marketplace, a
worsening of the current economic recession, or declines in real estate values
may further affect the fair value of these securities and increase the potential
that certain unrealized losses be designated as other-than-temporary in future
periods which may cause the Company to incur additional write-downs.
CAPITAL RESOURCES
Due to its strong capital ratios, broad licensing and excellent asset quality
and credit-worthiness, the Insurance Group remains well positioned to increase
or diversify its current activities. It is anticipated that future acquisitions
or other expansion of operations will be funded internally from existing capital
and surplus and parent company liquidity. In the event additional funds are
required, it is expected that they would be borrowed or raised in the public or
private capital markets to the extent determined to be necessary or desirable.
OUTLOOK
For the balance of this year and for 2021, the Company anticipates that it will:
·Continue to invest in the growth of our pet division, which will have
underwritten $117 million of premium (approximately 200,000 dogs and cats) by
the end of this year, which is a compound annual growth rate of 48% from 2018 to
2020. We would highlight the following pet initiatives:
·Investment in our administrator, PetPartners, which has an exclusive
relationship with the American Kennel Club and unique access to the breeder
channel.
·Pet insurance has now become a highly requested employee benefit, which has led
us to make it available through work-site marketing. This trend has been
amplified by a partnership between United Healthcare with FIGO and the
acquisition last year by MetLife, Inc. ("MetLife") of PetFirst Healthcare, LLC
(both of which use Independence American as their underwriter). We currently
have agreements in place or are negotiating to partner with well-known financial
brands (commonly referred to as "white-labeling") to offer PetPartners' pet
insurance through their distribution. In order to prepare for this potentially
material growth, we are making significant investments in our pet infrastructure
to handle the expected volume, and developing what will be the first true group
product in the pet insurance space.
·Independence American will continue to act as underwriter for three well-known
companies:
--------------------------------------------------------------------------------
43
--------------------------------------------------------------------------------
MetLife, FIGO and Pets Best Insurance Services, LLC.
·We will also accelerate the generation of non-risk revenue through the pet
division's newest brand asset, TailTrax, an all-inclusive subscription-based app
with Tele-Vet and other high-touch engagement features. This app will be
available without charge to insureds of PetPartners. In addition, we will begin
in 2021 to generate advertising and lead revenues from Petplace.com, which is
one of the leading sites for veterinarian-curated pet information with one
million visitors per month.
·Invest both our capital and efforts in continuing to develop a fully integrated
direct-to-consumer ("D2C") division, which can generate leads, has reporting
systems and sales automation platforms, and licensed agents servicing products
underwritten both by IHC's carriers and other nationally recognized insurers.
·Expand in-house capabilities through the "MarTech" acquisition we made in
April, which will accelerate proprietary lead generation and direct to consumer
growth. We have rapidly expanded our portfolio of consumer touchpoints across
all of our distribution channels, including web domains
(www.healthinsurance.org, www.medicareresources.org, www.healthedeals.com,
www.petplace.com, call centers, field agents, and social media). This should
improve our cost of sale by: (i) harnessing an in-house marketing team to drive
media efficiency and effectiveness, (ii) deploying data science and artificial
intelligence ("AI") to improve lead quality and intent; and (iii) leveraging a
proprietary lead marketplace to salvage unused leads and recoup costs.
·Build on our entry, in the fourth quarter of 2019, into the very large market
for senior products by selling Medicare products underwritten by leading
national insurance companies, including United Healthcare, Aetna, Humana, Anthem
and others. We have invested a considerable amount of capital entering this
market, and with an estimated 10,000 people aging into Medicare every day, there
is a significant opportunity to build a formidable footprint in this space. We
have enhanced our SalesForce CRM platform, as well as our producer licensing,
and consumer and web-based enrollment systems. We continue to build our MarTech
infrastructure by developing new brands, through AI data science, and via
automated remarketing efforts, all intended to allow us to generate a
significant volume of high-intent consumer leads. In conjunction with
continuously increasing our proficiency in efficiently generating leads, we will
continue to train and license additional senior-focused customer care center
agents for future enrollment periods. At the start of the 2021 Annual Enrollment
Period ("AEP") (which began on October 15th, 2020) we had 141 licensed agents
focused exclusively in the Medicare related product space. As a result of the
pandemic, our agents are currently deployed in a work-from-home model, and
although we do expect a majority of our agents to return to our physical call
centers when possible, we believe that the work-from-home model has proven to be
both safe and reliable, and we expect to be able to hire experienced agents that
will work within that model moving forward. This will allow us to recruit talent
outside of the geographic confines of our three physical call center locations
(Tampa, FL; Milwaukee, WI; St Louis Park, MN), and will help to further
accelerate what we believe will be meaningful growth in this line of business.
In addition, Independence American has launched its Medicare Supplement product
in twenty-nine states, although we do not anticipate substantial sales during
the current 2021 AEP as agents are primarily focused on selling Medicare
Advantage at this time.
·Increasingly emphasize sales by IHC Agencies of policies underwritten by
non-affiliated carriers, including small group stop-loss, ACA plans and Medicare
Advantage and Medicare Supplement; for which, they will receive commissions and
fees for selling these products and will not bear any of the insurance risk.
When they sell products for these other carriers, the IHC Agencies will record
revenue based on estimated constrained lifetime values ("LTV") representing the
expected commissions to be received over the lifetime of the policies sold. As
these products generally renew for multiple years, and the IHC Agencies do not
have any future performance obligations with regards to the renewal process,
they will record revenue at the time of sale based on our expected policy
duration. Therefore, due to the change in focus to sales of non-IHC products in
2020, particularly during AEP, we expect a significant increase in commission
revenues in the fourth quarter of 2020. When we do sell our products instead of
--------------------------------------------------------------------------------
44
--------------------------------------------------------------------------------
ACA, we are focusing on our "cover me to open enrollment" Short-Term Medical
product (which provides up to 36 months of coverage in many states), which
provides coverage from the day of sale to January 1st of the following year.
This allows insureds the option of moving to an ACA plan during an open
enrollment period without having to pay for days of coverage they don't need.
·Grow the number of agents using our wholly owned Web Based Entity ("WBE"), INSX
Cloud to do individual ACA enrollments. When agents utilize the INSX Cloud for
enrollments we earn fee income and commission. Additionally, we have specialty
health plans on the site that can be enrolled at the same time as the ACA plans
which earn underwriting profit for IHC carriers and in certain instances a
commission override for the agency.
•Continue to increase our DBL/PFL premiums. Effective January 1, 2018, Standard
Security Life began selling a new PFL rider as part of our New York DBL
policies. This is a result of New York State requiring employers to provide
PFL, which would cover job-protected paid leave to care for a new child or sick
family member or to assist when someone is called to active military service.
The New York Department of Financial Services increased the PFL premium rate by
76% for 2020, and further increased the rate by 89% for 2021.
·Achieve increases in both long-term and short-term disability premiums
generated from new distribution relationships.
·Accomplish increases in life and disability premium by developing additional
strategic functional and distribution partnerships, broaden worksite portfolio,
and enhance Business to Business and Business to Consumer website
functionality.
·Continue to evaluate strategic transactions. We plan to deploy some of our cash
to make additional investments and acquisitions that will bolster existing or
new lines of business.
·Continue to focus on administrative efficiencies.
·Continue to monitor the COVID-19 outbreak as it evolves. The duration of
COVID-19 and its potential effects on our business cannot be certain, we
currently cannot predict if there will be a material impact to our business,
results of operations or financial condition in the remainder of 2020. During
unprecedented times of uncertainty and high unemployment surrounding the
COVID-19 pandemic, we have fully transitioned our existing sales teams to work
from home. Our customer facing agents have transitioned to a full-time work at
home model, and although we have implemented enhanced technology solutions,
sales may be impacted as COVID-19 continues to develop.
Subject to making additional repurchases, acquisitions and investments, the
Company will remain highly liquid as a result of the continuing shorter duration
of the investment portfolio. The short duration of our portfolio enables us, if
we deem prudent, the flexibility to reinvest in much higher yielding longer-term
securities, which would significantly increase investment income in the future.
A low duration portfolio such as ours also mitigates the adverse impact of
potential inflation. IHC will continue to monitor the financial markets and
invest accordingly.
Our results depend on the adequacy of our product pricing, our underwriting, the
accuracy of our reserving methodology, returns on our invested assets, and our
ability to manage expenses. We will also need to be diligent with increased
rate review scrutiny to effect timely rate changes and will need to stay focused
on the management of medical cost drivers in the event medical trend levels
cause margin pressures. Factors affecting these items, as well as unemployment
and global financial markets, may have a material adverse effect on our results
of operations and financial condition.
--------------------------------------------------------------------------------
45
--------------------------------------------------------------------------------
© Edgar Online, source Glimpses