SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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COMMISSION FILE NUMBER 0-10306
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INDEPENDENCE HOLDING COMPANY
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(Exact name of Registrant as specified in its charter)
DELAWARE 58-1407235
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(State of Incorporation) (I.R.S. Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
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(Address of Principal Executive Offices) (Zip Code)
(203) 358-8000
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(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
SHARE PURCHASE WARRANTS
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(Title of Class)
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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
14,864,549 shares of common stock were outstanding as of
March 15, 1996 not including 4,377,900 shares held by wholly-owned
subsidiaries of the Registrant.
The aggregate market value of the common stock held by non-
affiliates of the Registrant computed by reference to the average
bid and asked prices of such stock, as of March 15, 1996 was
$25,663,290.
The Exhibit Index is located on page 67 of this filing.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of
Stockholders scheduled for June 27, 1996 are incorporated by
reference into Part III of this filing.
<PAGE>
PART I
ITEM 1. BUSINESS
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THE COMPANY
Independence Holding Company, a Delaware corporation, and
subsidiaries (the "Company" or "IHC") is a financial services
company engaged primarily in insurance activities through its
wholly-owned subsidiaries, Standard Security Life Insurance
Company of New York ("Standard Life"), Madison National Life
Insurance Company, Inc. ("Madison Life") and First Standard
Security Insurance Company ("First Standard") and their affiliates
(the "Insurance Group").
IHC is also engaged in sign manufacturing through its
majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman").
The Company intends, however, to reposition itself as strictly a
financial services company. In that regard, the Company is
considering various alternative transactions which would result in
the divestiture or significant reduction of the Company's
investment in Zimmerman, although there can be no assurance that
any such transactions would be consummated. The Consolidated
Financial Statements of IHC have been restated to present
Zimmerman as discontinued operations (see Note 2 of Notes to
Consolidated Financial Statements).
For information pertaining to IHC's business segments,
reference is made to Note 18 of Notes to Consolidated Financial
Statements.
INSURANCE GROUP
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GENERAL
Standard Life
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Standard Life, which has an A (Excellent) rating from A.M.
Best & Company, Inc. ("Best"), is incorporated and domiciled in
New York and licensed to sell insurance in all 50 states, the
District of Columbia and Puerto Rico. The core businesses of
Standard Life are: (i) underwriting specific and aggregate excess
medical insurance coverage ("stop loss") sold to employers that
self-insure their employees' health benefits, (ii) short-
term statutory disability benefits law business which it markets
in New York ("DBL"), and (iii) group life insurance marketed to
employers who self insure or enroll in health maintenance
organizations ("HMO's"). Standard Life has also developed
ancillary products, including reinsurance on, and risk-sharing and
other alliances with, HMO's and provider health care organizations
that desire to reduce their risk assumption and/or are required to
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purchase this coverage by regulation; point-of-service ("POS")
insurance coverage sold to employers who are participating in an
HMO health benefit plan and want to purchase a health insurance
product that will provide their employees with a choice of
providers; a behavioral health carve-out POS policy that is sold
to employers that wish to provide a supplemental mental health
insurance product to their employees; and reinsurance coverage for
life and health insurance sold in South and Central America. In
addition, Standard Life has existing business in-force in the
following lines which are in runoff: individual accident and
health, individual life, single premium immediate annuities, and
miscellaneous insurance business. Standard Life also actively
seeks opportunities to enter into cooperative underwriting and
reinsurance arrangements with other life and health insurers,
reinsurers, HMO's and managed care companies that it believes
would augment its existing businesses.
Madison Life
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Madison Life is incorporated and domiciled in Wisconsin and
licensed to sell insurance products in 42 states, the District of
Columbia and the Virgin Islands. Madison Life, which has a B+
(Very Good) rating from Best, markets group long-term and short-
term disability and group life products along with credit life and
credit disability products. The group long-term and short-term
disability and group life products are marketed to school
districts, municipalities and hospitals, primarily in the Midwest.
This business is sold through two marketing agencies that
specialize in these target markets and assist in the billing and
administration of the business. Approximately 80% of the credit
insurance premiums are written through credit unions. Other
sources of credit insurance premiums include automobile dealers,
banks and finance companies. Madison Life's existing blocks of
individual ordinary life, individual accident and health, and
annual and single premium deferred annuity business are in runoff.
Madison Life historically has purchased, on an assumption
reinsurance basis, blocks of group credit life and credit
disability insurance and individual ordinary life insurance and
annuity business to increase overall profitability. In March 1996,
Madison Life entered into an agreement to purchase, subject to
certain conditions, a block of pre-need individual ordinary life
insurance and annuity policies with reserves of approximately $33
million. Madison Life, through an investment subsidiary, has also
entered into several joint venture investments involved in
managed health care activities, including provider excess
reinsurance, development and management of provider sponsored
health plans and reinsurance of life and health insurance.
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<PAGE>
First Standard
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First Standard is incorporated and domiciled in Delaware and
licensed to write and reinsure property and casualty insurance in
Delaware and New York. In addition to its reinsurance business,
First Standard performs auditing and marketing services in
connection with Standard Life's stop loss business.
Managed Care
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The Insurance Group pursues opportunities in managed health
care in addition to the provider reinsurance, POS and specialty
carve-out products mentioned above. The Insurance Group is
participating with physician-hospital organizations, third party
administrators and other provider organizations to develop
provider sponsored community health plans and/or HMO's in target
markets in the United States. A provider sponsored health plan
("PSHP") is a managed care health plan which is co-sponsored by an
insurance company and a select group of providers to serve the
community in the providers' service area. The PSHP integrates the
financing and delivery of health care and is designed to compete
with HMO's and other managed care plans. The Insurance Group
believes that PSHP's which align the risk of the providers and the
insurance company have a greater chance of success, and is working
to establish PSHP's in which the providers and the insurance
company share the financial results of the plan's operations. The
Insurance Group currently has two such plans under development,
one in the Southwest and one in the Northeast. The PSHP's will
initially provide services to the commercial market; however, the
goal is for these entities to access the Medicare and Medicaid
markets either by becoming provider sponsored organizations as
contemplated by proposed legislation before Congress or by
becoming full-fledged HMO's.
The Insurance Group is focusing its development efforts
relating to PSHP's on smaller, secondary markets. While
opportunities in the urban markets still exist, the competition is
more intense. Market features which the Insurance Group believes
provide the most opportunity include those with the following
characteristics: populations in the range of 100,000 to 1,000,000
(to ensure a sufficient diversity of providers, lessen the cost of
advertising and marketing, and ensure a sufficient number of
enrollees), a favorable regulatory environment, a low managed care
penetration, an overcapacity of acute inpatient bed days, an
oversupply of specialist physicians, and favorable Medicare and
Medicaid populations.
GROUP INSURANCE
Standard Life obtained $72,153,000 of gross premiums and
$12,788,000 of net premiums in 1995 from stop loss policies as
compared to $67,091,000 of gross premiums and $9,181,000 of net
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premiums in 1994. In addition, $15,604,000 of group premiums was
obtained from DBL policies in 1995 while $17,062,000 was obtained
from DBL policies in 1994. Other group premiums at Standard Life,
primarily group medical reinsurance assumed, amounted to
$4,288,000 in 1995 as compared to $2,407,000 in 1994.
Madison Life markets and administers various types of
business sold on a group policy basis: (i) group long-term and
short-term disability, (ii) group accident and health, (iii) group
term life coverages and (iv) credit life and credit disability
coverages. Madison Life earned $1,910,000 and $1,317,000 of group
long-term and short-term disability premiums during 1995 and 1994,
respectively, an increase of 45%. Group dental premiums totaled
$1,490,000 for 1995 compared to $1,227,000 for 1994, for an
increase of 21%. Group term life premiums increased to $2,600,000
in 1995 from $1,824,000 in 1994, which represents an increase of
43%. Other group life premiums, primarily family term life
premiums, amounted to $1,245,000 in 1995 compared to $1,021,000 in
1994.
The credit life and credit disability net earned premiums
represent 53% of the aggregate premiums earned by Madison Life in
1995 as compared to 57% during 1994. This is due to the increased
premium volume of other lines of business, as well as the decrease
in earned premiums of credit blocks of insurance business assumed
in prior years. The credit life and credit health premiums earned
in 1995 amounted to $4,101,000 and $6,815,000, respectively, as
compared to $4,069,000 and $6,622,000, respectively, during 1994,
an increase in the aggregate of 2%.
INDIVIDUAL INSURANCE AND ANNUITIES
At December 31, 1995, approximately 15% of Standard Life's
individual life insurance in-force consisted of participating
ordinary life insurance; substandard risks represented less than
2% of individual life insurance in-force. Approximately 2% of
Standard Life's premiums consisted of individual accident and
health insurance contracts, primarily non-cancelable, guaranteed
renewable disability income, and business and professional
overhead insurance. Standard Life no longer markets individual
insurance and annuity products. Effective December 31, 1993,
Standard Life reinsured a 60% quota share of its lotto annuity
business on a modified coinsurance basis.
At December 31, 1995, individual life insurance of various
types comprised approximately 14% of Madison Life's net life
insurance in-force. At that same date, the group life in-force had
increased to comprise approximately 67% of the net life insurance
in-force, up from approximately 54% as of December 31, 1994.
Approximately 4% of the total individual life insurance in-force
was participating. At December 31, 1995, Madison Life had 3,140
individual annuity policies in-force. Reserves for future annuity
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benefits amounted to $9,727,000. Madison Life is no longer
marketing traditional individual insurance and annuity products,
but has commenced writing substandard ordinary and substandard
long-term disability products.
SALES
Standard Life and Madison Life are direct writers that issue
policies directly to insureds. Standard Life, and to a lesser
degree Madison Life, are also reinsurers that share in the
insurance risks of other underwriters through reinsurance of such
risks. First Standard is a reinsurer, not a direct writer.
As direct writers, Standard Life and Madison Life sell
policies through independent general agents, soliciting agents,
and managing general underwriters who are non-salaried independent
contractors compensated on a commission or fee basis. General
agents and agents are paid commissions based upon the amount of
premiums they produce. Managing general underwriters receive
administrative fees.
REINSURANCE AND POLICY RETENTION LIMITS
Reinsurance is used to reduce the potentially adverse
financial impact of large individual risks and to reduce the drain
on statutory income and surplus related to new business. By using
reinsurance, Standard Life, Madison Life and First Standard
(collectively the "Insurance Subsidiaries") are able to write
policies in amounts larger than they could otherwise accept. The
amount reinsured is the portion of each policy in excess of the
retention limit on a particular policy. Retention limits for
Standard Life at December 31, 1995 were: (1) $210,000 per life on
individual life and corresponding disability waiver of premium;
(2) no retention on accidental death benefits provided by rider to
individual life policies; (3) 10% to 25% on its stop loss
business; and (4) a maximum of $2,500 of monthly benefits on
disability income policies. Standard Life continuously monitors
its level of reinsurance with the intention to readjust such
levels as its confidence increases with a particular line; in that
regard, Standard Life increased its maximum retention of the risk
on its stop loss business from 20% to 25% in 1995. In addition,
Standard Life has purchased additional reinsurance for its stop
loss business on the portion of risks which it retains, limiting
its exposure on a catastrophic (aggregate) loss or any unusual
individual (specific) loss. Further, Standard Life has stop loss
and catastrophe reinsurance to protect against particularly
adverse mortality which might occur with respect to its overall
life business.
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Current maximum retention limits for Madison Life are: (1)
10% to 50% on group long-term and short-term disability insurance,
group term life, group accidental death and dismemberment
insurance and substandard ordinary life and substandard long-term
disability insurance - maximum net retention for life coverage
under these contracts is $25,000 and the maximum retained
disability benefit is $1,875 per month; (2) no retention on
accidental death benefits provided by rider to group life
policies; (3) $25,000 per life on group credit single premium life
and on group family life; (4) $1,000 per month on credit
disability insurance; (5) $25,000 on any one life on individual
ordinary life; and (6) $600 maximum monthly benefit per life on
individual accident and health insurance. In addition, Madison
Life has purchased additional reinsurance on the portion of risks
which it retains, limiting its exposure on a catastrophic
(aggregate) loss.
At December 31, 1995, the total amount of ceded reinsurance
in-force for the Insurance Subsidiaries was $1,988,965,000. The
Insurance Subsidiaries remain liable with respect to the insurance
in-force which has been reinsured against the unlikely event that
the assuming reinsurers are unable to satisfy their obligations.
For further information pertaining to Reinsurance, reference
is made to Note 17 of Notes to Consolidated Financial Statements.
RESERVES AND INVESTMENTS
As required by insurance laws and regulations, the Insurance
Subsidiaries establish reserves to meet obligations on policies
in-force. These reserves are amounts which, with additions from
premiums expected to be received and with interest on such
reserves at certain assumed rates, are calculated to be sufficient
to meet anticipated future policy obligations. Premiums and
reserves are based upon certain assumptions with respect to
mortality, lapses and interest rates effective at the time the
policies are issued. The Insurance Subsidiaries also establish
appropriate reserves for substandard business, annuities and
additional policy benefits, such as waiver of premium and
accidental death. Standard Life and Madison Life are also
required by law to have a cash flow adequacy analysis, which
projects the amount and timing of cash flows to the estimated
maturity date of liabilities, completed by the certifying actuary
of each company. The Insurance Subsidiaries have invested and will
continue to invest their respective assets which support the
reserves and other funds in accordance with applicable insurance
law. The Insurance Subsidiaries' investments are supervised by
their respective Boards of Directors.
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COMPETITION AND REGULATION
The Insurance Group competes with many larger insurance
companies, HMO's and other managed care organizations. Although
most life insurance companies are stock companies, mutual
companies also write life insurance in the United States. Mutual
companies may have certain competitive advantages since profits
inure directly to the benefit of the policyholders. HMO's may also
have certain competitive advantages since they are subject to
different regulations than insurance companies.
IHC is an insurance holding company. As such, IHC and the
Insurance Subsidiaries are subject to regulation and supervision
by the insurance supervisory agencies of New York in the case of
Standard Life, Wisconsin in the case of Madison Life, and
Delaware in the case of First Standard. The Insurance Subsidiaries
are also subject to regulation and supervision in all states in
which they are licensed to sell insurance. These supervisory
agencies have broad administrative powers with respect to the
granting and revocation of licenses to transact business, the
licensing of agents, the approval of policy forms, the approval of
commission rates, the form and content of mandatory financial
statements, reserve requirements and the types of investments
which may be made. Such regulation is designed primarily for the
benefit of policyholders rather than the stockholders of an
insurance company.
Certain transactions within the holding company system are
also subject to regulation and supervision by such regulatory
agencies. All such transactions must be fair and equitable. Notice
to or prior approval by the insurance commissioner is required
with respect to transactions affecting the ownership or control of
an insurer and of certain material transactions, including
dividend declarations, between an insurer and any person in its
holding company system. In addition, periodic disclosure is
required concerning the operations, management and financial
condition of the insurer within the holding company system. Each
insurer is also required to file detailed annual statements with
each supervisory agency, and its affairs and financial conditions
are subject to periodic examination.
Beginning in 1993, risk-based capital requirements were
imposed on life and property and casualty insurance companies.
The risk-based capital ratio is determined by dividing a company's
total adjusted capital, as defined, by its authorized control
level risk-based capital. Companies that do not meet certain
minimum standards require specified corrective action. The
respective risk-based capital ratios for each of the Company's
Insurance Subsidiaries significantly exceeds such minimum ratios.
EMPLOYEES
The Insurance Group has 98 employees.
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<TABLE>
PRODUCT LINES
The following table shows the aggregate results of Standard Life, Madison Life and
First Standard by product line for the periods indicated:
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING NET REALIZED
NET COMMISSIONS INCOME AND OPERATING
INVESTMENT BENEFITS, AND (LOSS) BEFORE UNREALIZED INCOME
PREMIUM AND OTHER CLAIMS AND OTHER GAINS AND GAINS (LOSS) BEFORE
INCOME INCOME RESERVES EXPENSES INCOME TAXES (LOSSES) INCOME TAXES
------- ---------- --------- ---------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
1995
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Group, Individual
and Credit A&H.....$44,080 $ 6,586 $27,347 $17,674 $ 5,645 $ (446) $ 5,199
Group, Individual
and Credit Life.... 12,284 5,610 9,464 6,068 2,362 (20) 2,342
Group and Individual
Annuity............ 37 1,609 534 908 204 52 256
------ ------ ------ ------ ------ ------ ------
TOTAL.............$56,401 $13,805 $37,345 $24,650 $ 8,211 $ (414) $ 7,797
====== ====== ====== ====== ====== ====== ======
1994
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Group, Individual
and Credit A&H.....$39,205 $ 5,403 $23,975 $15,708 $ 4,925 $ (581) $ 4,344
Group, Individual
and Credit Life.... 11,379 4,833 8,322 6,202 1,688 (1,033) 655
Group and Individual
Annuity............ 39 1,085 520 513 91 (400) (309)
------ ------ ------ ------ ------ ------ ------
TOTAL.............$50,623 $11,321 $32,817 $22,423 $ 6,704 $(2,014) $ 4,690
====== ====== ====== ====== ====== ====== ======
1993
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Group, Individual
and Credit A&H.....$35,071 $ 6,682 $21,929 $14,586 $ 5,238 $ 334 $ 5,572
Group, Individual
and Credit Life.... 12,410 7,041 8,509 6,434 4,508 458 4,966
Group and Individual
Annuity............ 57 2,083 3,562 450 (1,872) 106 (1,766)
------ ------ ------ ------ ------ ------ -----
TOTAL.............$47,538 $15,806 $34,000 $21,470 $ 7,874 $ 898 $ 8,772
====== ====== ====== ====== ====== ====== ======
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</TABLE>
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INSURANCE IN-FORCE AND GROWTH OF BUSINESS
The following table summarizes the aggregate insurance
activities of Standard Life, Madison Life and First Standard:
1995 1994 1993
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(DOLLARS IN THOUSANDS)
LIFE INSURANCE IN-FORCE:
Group...........................$3,211,771 $2,156,780 $1,648,184
Individual term................. 405,547 460,714 429,967
Individual permanent............ 438,900 502,940 445,597
Credit.......................... 518,593 539,990 614,659
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TOTAL LIFE INSURANCE
IN-FORCE (1), (2).............$4,574,811 $3,660,424 $3,138,407
========= ========= =========
NEW LIFE INSURANCE:
Group...........................$ 529,900 $ 835,024 $ 367,012
Individual term................. 536 133 426
Individual permanent............ 1,271 328 4,338
Credit.......................... 258,493 249,831 365,046
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TOTAL NEW LIFE INSURANCE.......$ 790,200 $1,085,316 $ 736,822
========= ========= =========
PREMIUM INCOME:
Health:
Group..........................$ 35,982 $ 31,210 $ 26,161
Individual..................... 1,283 1,373 1,633
Credit......................... 6,815 6,622 7,277
Life:
Individual..................... 4,178 4,411 5,038
Individual and group annuity... 37 39 57
Credit......................... 4,101 4,069 4,950
Group.......................... 4,005 2,899 2,422
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TOTAL PREMIUM INCOME (3).......$ 56,401 $ 50,623 $ 47,538
========= ========= =========
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NOTES:
(1) Includes participating
insurance...................$ 30,637 $ 38,331 $ 42,649
(2) Includes ceded reinsurance of:
Group.......................$1,553,234 $1,175,196 $ 863,992
Individual.................. 380,793 473,507 378,281
Credit...................... 54,938 76,252 129,028
--------- --------- ---------
Total ceded reinsurance....$1,988,965 $1,724,955 $1,371,301
========= ========= =========
(3) After deducting ceded
reinsurance premiums of.....$ 77,290 $ 71,827 $ 59,788
========= ========= =========
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DISCONTINUED OPERATIONS
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GENERAL
The Company's majority owned subsidiary, Zimmerman Sign
Company ("Zimmerman"), is a major producer of exterior site and
product identification displays for national and regional
marketing organizations. Zimmerman, which was founded in 1901,
began its operations in Dallas, Texas as a custom sign
manufacturer selling to local customers. Today, Zimmerman offers
a full range of product design, engineering, manufacturing and
site installation services to customers throughout the United
States and internationally.
PRODUCTS
Zimmerman's primary product is exterior site identification
signage consisting of double or single plastic faced signs housed
in aluminum or metal skinned and steel framed cabinets. In
general, the signs are internally illuminated. Zimmerman also
produces a variety of architectural signage utilizing routed
faces, individual letters and related products. Production
facilities are located in Longview and Jacksonville, Texas. The
Jacksonville plant generally produces signs less than 80 square
feet in size in production run quantities. The Longview plant
manufactures signs in shorter run custom/production quantities
which include large high rise signs and specialty products. Both
plants have the capability to support each other's production
needs. The balance of Zimmerman's sales is attributable to its
Turnkey Division, which serves as general contractor to install
signs that are manufactured by Zimmerman.
PRINCIPAL CUSTOMERS, SALES AND MARKETING
Zimmerman sells directly to large multiple location retailers
on a regional and national basis. Its products are also sold to
customers located in Mexico and Canada. Zimmerman's major market
is the petroleum retailing industry, and its largest product line
consists of medium sized, double faced site identification and
product price signs for that industry. Zimmerman's customers also
include the convenience store, restaurant, automotive and
financial services industries. Zimmerman intends to continue to
direct the vast majority of its sales and production efforts
toward servicing customers with significant annual site
identification requirements.
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Over the past three years, sales have grown from $33.0
million to $41.7 million. In 1995, Zimmerman had three
significant customers which accounted for approximately 46% of
sales, two significant customers which accounted for 30% of sales
in 1994, and one significant customer which accounted for 26% of
sales in 1993.
PRODUCTION, RAW MATERIALS AND PRODUCT BACKLOG
Zimmerman designs and engineers products to customer
specifications. Manufacturing operations typically consist of
screening and molding acrylic or polycarbonate faces, constructing
sign cabinets from customer specific aluminum extrusion or
building steel framed and metal skinned cabinets and assembling
the product together with electrical components.
Zimmerman's Turnkey Division provides sign installation for
many of its customers. In those cases, preparation of site
surveys, compliance with local zoning ordinances, and on site
installation of the sign are managed by Zimmerman.
Zimmerman's principal raw materials are plastic, aluminum,
and electrical components. It has multiple sources for its raw
materials and has not experienced material supply problems.
Zimmerman had $24,100,000 in backlog orders at December 31,
1995, the highest in its history, as compared to $17,700,000 at
December 31, 1994. The 1995 backlog orders are expected to be
shipped during 1996, and represent contractual obligations of
customers, primarily for open purchase orders.
The Jacksonville plant was expanded in 1994 through the
addition of a steel pole fabrication shop, and an 8,000 square
foot addition to the Longview plant was completed in December 1995
to provide improved storage. Additional expansion needs are
continuously under consideration.
COMPETITION
The sign industry is large and fragmented. Many sign
companies perform custom work for local customers and/or provide
maintenance and installation services, and have no capacity for
production run quantities. Zimmerman competes with several other
sign companies for high volume sign users which it considers its
primary market. Competition is conducted on the basis of price and
a wide variety of services, including design, production,
installation, and financial capabilities.
EMPLOYEES
Zimmerman had on average 419 employees during 1995.
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ITEM 2. PROPERTIES
----------
IHC
IHC has entered into a renewable short-term arrangement with
Geneve Corporation for the use of 7,500 square feet of office
space as its corporate headquarters in Stamford, Connecticut.
Standard Life
Standard Life leases approximately 13,500 square feet of
office space in New York, New York as its corporate headquarters.
Madison Life
Madison Life leases approximately 10,300 square feet of
office space in Middleton, Wisconsin as its corporate
headquarters.
Zimmerman
Zimmerman owns a 79,000 square foot manufacturing facility in
Longview, Texas, and owns a 10,000 square foot manufacturing
facility adjacent to its 102,000 square foot leased plant in
Jacksonville, Texas. In Dallas, Texas, 28,000 square feet of
leased manufacturing space is sublet to a third party. Zimmerman
owns 20 acres of industrial zoned land in Jacksonville, Texas. In
1994, Zimmerman leased 12,000 square feet of office space which
serves as its corporate headquarters in Tyler, Texas. It also
leases 1,200 square feet of office space in Dallas, Texas.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company knows of no material pending legal proceedings to
which the Company is a party or of which any of its property is
the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
IHC common stock and share purchase warrants expiring June
30, 2001 ("Warrants") are traded over the counter. The common
stock trades on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") under the symbol INHO.
Warrant prices are quoted on the National Association of
Securities Dealers, Inc. Over the Counter Bulletin Board. The
following tabulation shows the high and low sales prices for IHC's
common stock and the high and low bid prices for the Warrants. The
Warrant information was obtained from the National Quotation
Bureau.
COMMON STOCK WARRANTS
------------ ------------
HIGH LOW HIGH LOW
----- ----- ---- -----
QUARTER ENDED:
December 31, 1995........... 4 3 1/8 1/16 1/100
September 30, 1995.......... 4 3 3/16 3/20 1/100
June 30, 1995............... 3 1/2 3 1/16 3/20 1/100
March 31, 1995.............. 3 3/8 3 3/20 1/100
QUARTER ENDED:
December 31, 1994........... 3 1/4 3 3/16 1/100
September 30, 1994.......... 3 3/8 2 7/8 1/50 1/100
June 30, 1994............... 3 1/8 2 7/8 1/100 1/100
March 31, 1994.............. 3 3/4 2 7/8 1/20 1/100
The foregoing prices for the Warrants do not necessarily
represent actual transactions, but rather the quoted prices
between dealers, excluding retail markup, markdown or commission.
At March 15, 1996, the number of record holders of IHC's (i)
common stock was 3,160 and (ii) Warrants was 1,266.
IHC declared a dividend of $.02 per share on its common stock
on November 16, 1995 and November 10, 1994.
- 14 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a summary of selected consolidated financial
data with respect to the Company for each of the last five years:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA:
Total revenues..............$ 71,427 $ 61,504 $ 65,444 $ 67,304 $ 67,440
======= ======= ======= ======= =======
Income applicable to
common shares from
continuing operations......$ 6,172 $ 2,396 $ 4,041 $ 3,010 $ 3,993
======= ======= ======= ======= =======
BALANCE SHEET DATA:
Summary of investments......$185,031 $178,285 $184,398 $163,739 $159,755
Total assets................$286,207 $266,368 $276,989 $249,530 $263,991
Insurance policy benefits,
claims and other policy
liabilities................$158,233 $150,988 $159,090 $149,083 $159,483
Long-term debt..............$ 12,111 $ 14,111 $ 15,161 $ 161 $ 5,331
Common stockholders'
equity.....................$ 71,607 $ 55,694 $ 62,051 $ 57,205 $ 55,730
PER SHARE DATA:
Cash dividends declared per
common share...............$ .02 $ .02 $ .02 $ .02 $ .02
Income per common
share from continuing
operations before
cumulative effect of
accounting changes.........$ .41 $ .15 $ .25 $ .17 $ .22
Net income per
common share...............$ .54 $ .27 $ .31 $ .25 $ .24
Book value per common share.$ 4.82 $ 3.59 $ 3.92 $ 3.56 $ 3.10
The above table has been restated to reflect (i) Zimmerman as
discontinued operations as described in Note 2 of Notes to
Consolidated Financial Statements and (ii) the adoption of
Statement of Financial Accounting Standards No. 113 "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" in 1993.
The Selected Financial Data should be read in conjunction with the
accompanying Consolidated Financial Statements and notes thereto.
- 15 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Independence Holding Company and subsidiaries (the "Company"
or "IHC") consists of one continuing operating segment: the
Insurance Group. This segment is composed of IHC's wholly-owned
subsidiaries, Standard Security Life Insurance Company of New York
("Standard Life"), Madison National Life Insurance Company, Inc.
("Madison Life") and First Standard Security Insurance Company
("First Standard") and their affiliates. All remaining income,
principally income from parent company liquidity (cash, cash
equivalents, resale agreements and marketable securities) and
expense items associated with parent company activities, the
Company's remaining real estate operations and certain other
investments of the Company are included in Corporate.
IHC is also engaged in sign manufacturing through its
majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman").
The Company intends, however, to reposition itself as strictly a
financial services company engaged principally in insurance
activities. In that regard, the Company is considering various
alternative transactions which would result in the divestiture or
significant reduction of the Company's investment in Zimmerman,
although there can be no assurance that any such transactions
would be consummated. The Consolidated Financial Statements of IHC
have been restated to present Zimmerman as discontinued operations
(see Note 2 of Notes to Consolidated Financial Statements).
Additional information regarding the Company's segments is
provided in Note 18 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
---------------------
1995 COMPARED TO 1994
- ---------------------
The Company's net income applicable to common shares was $8.2
million or $.54 per share for the year ended December 31, 1995 as
compared to $4.2 million or $.27 per share for the year ended
December 31, 1994, while operating income from continuing
operations increased to $4.8 million for the year ended December
31, 1995 from $1.7 million for the year ended December 31, 1994.
The Company had net realized and unrealized losses of $1.9 million
in 1994. Excluding net realized and unrealized gains, the Company
had operating income from continuing operations of $4.8 million in
1995 as compared to $3.6 million for 1994. Income from
discontinued operations, net was $2.0 million for the year ended
December 31, 1995 as compared to $1.8 million for the year ended
December 31, 1994.
- 16 -
<PAGE>
Insurance Group
---------------
Standard Life's core businesses are: (i) underwriting
specific and aggregate excess medical insurance coverage ("stop
loss") sold to employers that self-insure their employees' health
benefits, (ii) short-term statutory disability benefits law
business in New York ("DBL") and (iii) group life insurance
marketed to employers who self insure or enroll in health
maintenance organizations ("HMO's"). Standard Life has also
developed ancillary products, including reinsurance on, and risk-
sharing and other alliances with, HMO's and provider health care
organizations that desire to reduce their risk assumption and/or
are required to purchase this coverage by regulation; point-of-
service ("POS") insurance coverage sold to employers who are
participating in an HMO health benefit plan and want to purchase
a health insurance product that will provide their employees with
a choice of providers; a behavioral health carve-out POS policy
that is sold to employers that wish to provide a supplemental
mental health insurance product to their employees; and
reinsurance coverage for life and health insurance sold in South
and Central America. In addition, Standard Life has existing
business in-force in the following lines of business which are in
runoff: individual accident and health, individual life, single
premium immediate annuities, and miscellaneous insurance business.
Standard Life also actively seeks opportunities to enter into
cooperative underwriting and reinsurance arrangements with other
life and health insurers, reinsurers, HMO's and managed care
companies, that it believes would augment its existing businesses.
Standard Life also performs auditing and marketing services in
connection with its stop loss business.
Madison Life markets group long-term and short-term
disability and group life products as well as credit life and
credit disability products. The group long-term and short-term
disability and group life products are marketed to school
districts, municipalities and hospitals, primarily in the Midwest.
This business is sold through two marketing agencies that
specialize in these target markets and assist in the billing and
administration of the business. Approximately 80% of the credit
insurance premiums are written through credit unions. Other
sources of credit insurance premiums include automobile dealers,
banks and finance companies. Its existing blocks of individual
ordinary life, individual accident and health, and annual and
single premium deferred annuity business are in runoff. Madison
Life historically has purchased, on an assumption reinsurance
basis, blocks of group credit life and credit disability insurance
and individual ordinary life insurance business to increase
overall profitability. In March 1996, Madison Life entered into
an agreement to purchase, subject to certain conditions, a block
of pre-need individual ordinary life insurance and annuity
policies with reserves of approximately $33 million. Madison
Life, through an investment subsidiary, has also entered into
several joint venture investments involved in managed health care
- 17 -
<PAGE>
activities, including provider excess reinsurance, development and
management of provider sponsored health plans and reinsurance of
life and health insurance.
The Insurance Group had operating income of $7.8 million for
the year ended December 31, 1995 versus $4.7 million for the year
ended December 31, 1994. Operating income includes net realized
and unrealized losses of $.4 million for the year ended December
31, 1995 versus $2.0 million of losses for the year ended December
31, 1994. The Company makes decisions to sell securities based on
cash flow needs, investment opportunities, and the condition of
the market, thus creating fluctuations in gains from one year to
the next. Operating income excluding net securities gains and
losses was $8.2 million for the year ended December 31, 1995 as
compared to $6.7 million for the year ended December 31, 1994.
Premium revenues increased $5.8 million. Madison Life had an
increase of $2.0 million primarily due to an increase of $.8
million in group term life and an increase of $.6 million in group
long-term disability as a result of additional written premiums,
a $.4 million increase in other life and health lines of business
and a $.2 million increase in the credit lines of business.
Premium revenues at Standard Life increased $3.8 million due to an
increase in stop loss premiums of $3.5 million, a $.9 million
increase in premiums from group accident and health business
assumed, along with a $.4 million increase from a new POS product
and a $.6 million increase from a new HMO reinsurance product.
These increases were partially offset by a $1.4 million decrease
in DBL premiums due to a higher level of lapses experienced and a
$.2 million decrease in ordinary life business. Net investment
income increased $1.1 million primarily due to a realignment of
the portfolio and higher returns on certain equity investments
resulting in a 7.4% return on investments in 1995 compared to a
6.9% return on investments in 1994. Equity income decreased $.9
million due to expenses sustained from certain start-up insurance
related partnerships. Other income increased $2.2 million as a
result of the following: (i) an increase of $.4 million in stop
loss fees, a $.4 million reduction in lotto annuitant expenses and
a $.3 million increase in reinsurance recoveries at Standard Life,
and (ii) a charge against other income of $1.1 million made in
1994 for a stop loss treaty at Madison Life.
Insurance benefits, claims and reserves increased by $4.5
million for the year ended December 31, 1995 compared to the same
period of 1994. Madison Life's expenses increased $2.1 million
due to an increase of $.8 million in group term life and group
long-term disability claims attributable to the additional
writings in these lines of business, a $.5 million increase in
ordinary life and individual accident and health claims and
reserves, and an $.8 million increase in credit life and credit
accident and health claims. Standard Life's expenses increased
$2.4 million due to an increase in stop loss claims and reserves
of $1.5 million, an increase of $.4 million in reserves on the new
line of HMO reinsured business, an increase of claims on the
assumed block of group accident and health business of $.5
- 18 -
<PAGE>
million, and a $.8 million increase in claims from the ordinary
life annuity, individual and group accident and health lines of
business primarily from higher than anticipated claims on this
closed block of business; the foregoing was partially offset by a
decrease in DBL reserves of $.8 million due to favorable
experience and reduced premium volume on this block of business.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $2.2
million. Standard Life's expenses increased by $2.4 million
resulting from an increase in commissions of $.9 million, and an
increase in insurance taxes of $.3 million from higher premiums
and an increase in general expenses of $1.2 million. Madison
Life's general expenses decreased by $.2 million. A decrease of
$1.2 million in net commission expense due primarily from the
credit blocks of business was offset by a $1.0 million increase in
general expenses. The increase in general expenses for both
Standard Life and Madison Life resulted from an increase in
employee costs, consulting fees and premium taxes related to the
growth and development of new business.
Corporate
---------
Net operating expenses remained constant for the year ended
December 31, 1995 as compared to 1994 levels. Investment income
increased $.1 million and realized gains increased $.3 million.
Equity income decreased $.1 million and other income declined $.2
million reflecting a sale of real estate in 1994. Interest
expense increased $.1 million due to higher interest rates on the
debt of a corporate subsidiary, and general and administrative
expenses remained constant.
Discontinued Operations
-----------------------
Operating income of Zimmerman increased $.3 million to $3.3
million for the year ended December 31, 1995 as compared to 1994.
Sales increased $5.2 million while cost of sales increased $4.3
million, resulting in a gross profit margin of 22.5% in 1995
versus 23.2% in 1994. The gross profit margin for the year ended
December 31, 1994 was favorably impacted by a non-recurring fixed
price freight contract. Interest expense increased $.4 million
due to higher borrowings supporting the increase in sales.
Selling, general and administrative expenses increased $.2 million
due to the higher sales volume in 1995.
1994 COMPARED TO 1993
- ---------------------
The Company's net income applicable to common shares was $4.2
million or $.27 per share for the year ended December 31, 1994 as
compared to $5.1 million or $.31 per share for the comparable
period of 1993. Operating income from continuing operations
decreased to $1.7 million in the year ended December 31, 1994 from
$5.6 million in the year ended December 31, 1993. The Company had
- 19 -
<PAGE>
net realized and unrealized losses of $1.9 million in 1994 as
compared to gains of $.8 million in 1993. Excluding net realized
and unrealized gains, the Company had operating income from
continuing operations of $3.6 million in 1994 as compared to $4.8
million for 1993. Net income from discontinued operations was $1.8
million for the year ended December 31, 1994 as compared to $1.4
million for the year ended December 31, 1993.
Insurance Group
---------------
The Insurance Group had operating income of $4.7 million for
the year ended December 31, 1994 versus $8.8 million for the year
ended December 31, 1993. Operating income includes realized and
unrealized losses of $2.0 million in 1994 compared to realized and
unrealized gains of $.9 million in 1993. Operating income
excluding net securities gains or losses was $6.7 million in 1994
versus $7.9 million in 1993. Premium revenues increased $3.1
million. Madison Life had a decrease of $1.1 million primarily
from the credit lines of business due to the run-off status of the
purchased credit blocks of business from 1991. Premium revenues
at Standard Life increased $4.2 million due to an increase in stop
loss premiums of $1.9 million and an increase in DBL premiums of
$2.1 million reflecting Standard Life's continued growth in these
lines of business. Standard Life also had a $.9 million increase
in premiums due to the assumption of a group accident and health
block of business, partially offset by a $.7 million decrease due
to the continued runoff of the Company's closed blocks of life,
annuity and individual and group accident and health lines of
business. Net investment income decreased $.3 million resulting
in a 6.9% return on investments in 1994 as compared to a 7.3%
return on investments in 1993. Equity income decreased $.8
million due to lower returns on certain partnership investments in
1994. Madison Life reported other income of $2.3 million in 1993
related to the anticipated recovery from a reinsurer on a stop
loss treaty for credit business. During 1994, the estimated
recovery was reduced to $1.0 million. Other income at Standard
Life increased $.3 million as a result of an increase in stop loss
fees of $.5 million, partially offset by a reduction in
reinsurance recoveries of $.2 million due to the partial disposal
of lotto annuity business at the end of 1993 and a reduction in
reinsurance recoveries on its closed block of ordinary life
business.
Insurance benefits, claims and reserves decreased by $1.2
million for the year ended December 31, 1994 compared to 1993.
Madison Life's and Standard Life's expenses decreased by $.2
million and $1.0 million, respectively. Standard Life's decrease
was related to a $1.3 million reduction in claims and reserves
connected with the ordinary life, group life and individual
accident and health lines of business which is in runoff status
and a $3.0 million decrease in payments and reserves on the lotto
annuity contracts due to the partial disposal of this business in
1993. These decreases were partially offset by an increase in stop
- 20 -
<PAGE>
loss claims and reserves of $2.1 million resulting from the
increase in premiums, an increase of $.5 million relating to the
increase in DBL business and a $.7 million increase in claims due
to the assumed group accident and health block of business.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $1.0
million: Standard Life's expenses increased by $1.0 million
resulting from an increase in commissions of $.8 million from
higher premiums and an increase in general expenses of $.2
million, while Madison Life's expenses remained constant.
Corporate
---------
Net operating expense decreased $.2 million from 1993 levels.
Investment income remained steady while realized gains increased
$.3 million due to a corporate investment. Other income increased
$.2 million from the sale of a real estate investment. Interest
expense increased $.9 million due to a $15.0 million credit
agreement entered into in late 1993 by a corporate subsidiary. At
the end of 1994, $14.0 million remained outstanding under this
credit agreement. Selling, general and administrative expenses
decreased $.6 million due to a reduction in consulting expenses in
1994 compared to 1993, and the write down of certain real estate
investments in 1993.
Discontinued Operations
-----------------------
Operating income of Zimmerman increased $.8 million to $3.0
million for the year ended December 31, 1994 as compared to 1993.
Sales increased $3.4 million while cost of sales increased $2.1
million, resulting in a gross profit margin of 23.2% in 1994
versus 21.6% in 1993. Interest expense and selling, general and
administrative expenses increased by $.5 million primarily due to
the higher sales volume.
LIQUIDITY
---------
General
-------
The net cash provided by operating activities amounted to
$11.5 million in 1995, while investing activities provided $3.4
million of cash. During 1995, $8.8 million of cash was used by
financing activities including: the repurchase of $2.3 million of
the Company's common stock, the repayment of long-term debt of
$2.0 million, the payment of investment type insurance contracts
of $4.2 million and the payment of a dividend on common stock of
$.3 million declared in 1994 and paid in 1995.
- 21 -
<PAGE>
Insurance Group
---------------
The Insurance Group normally provides cash flow from
operations, from the receipt of scheduled principal payments on
its portfolio of fixed income securities and from earnings on
short-term investments. Such cash flow is used partially to
finance liabilities for insurance policy benefits. These
liabilities represent long-term obligations which are calculated
using certain assumed interest rates. 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. Of the aggregate carrying value
of the Insurance Group's investment assets, approximately 83% was
invested in investment grade fixed income securities, resale
agreements and cash and cash equivalents at December 31, 1995.
These investments carry less risk and therefore lower interest
rates than other types of fixed maturity investments. At December
31, 1995, approximately 4.7% of the carrying value of investable
assets was invested in diversified non-investment grade fixed
income securities (investments in such securities have different
risks than investment grade securities, including greater risk of
loss upon default, and thinner trading markets).
Commensurate with the dramatic and rapid rise in interest
rates during 1994 and continuing through the first quarter of
1995, the Company employed a strategy of hedging portions of its
intermediate term and long-term fixed income securities against
principal changes. This strategy utilized readily marketable
short-term put and call options on interest rate futures
contracts. The value of these put and call options varies
depending upon the change in the underlying futures contract,
which principally varies with interest rate movements on
applicable U.S. Treasury securities. The Company will employ this
strategy and other appropriate hedging strategies in considering
the duration of its fixed income portfolio and insurance
liabilities as well as its interest rate outlook.
The Company monitors its investment portfolio on a continuous
basis and believes the liquidity of the Insurance Group will not
be adversely affected by its current investments.
Corporate
---------
Corporate derives its funds principally from (i) dividends
and interest income from the Insurance Group, (ii) tax payments
and management fees from its subsidiaries and (iii) investment
income from Corporate liquidity.
State insurance laws restrict the Insurance Group's ability
to make dividend payments to the parent company (see Note 19 of
Notes to Consolidated Financial Statements). Regulatory
constraints have historically not affected IHC's consolidated
liquidity, although they have limited the ability of the parent
company to use cash generated by the Insurance Group to fund
operating expenses, interest and dividend payments at Corporate.
- 22 -
<PAGE>
During 1995, the Company repurchased 664,181 shares of common
stock at a cost of $2.3 million under its stock and warrant
repurchase program. Through December 31, 1995, 4,260,432 shares of
common stock have been repurchased under this program at an
aggregate cost of approximately $10.9 million, and 404,491 share
purchase warrants were repurchased at an aggregate cost of
approximately $.1 million. The Company may purchase additional
shares of common stock and warrants in the open market or
otherwise from time to time.
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $12.4 million at
December 31, 1995. At the present time, the Company is not in
need of any additional long-term financing.
Discontinued Operations
-----------------------
For the year ended December 31, 1995, $1.5 million of cash
was used by Zimmerman's operations reflecting an increase in
receivables and inventories due to higher sales volume. This use
of cash was financed by income generated during the year and a
$1.7 million net increase in bank borrowings. Zimmerman has a
$10.0 million bank line of credit of which $8.6 million was
outstanding at December 31, 1995. The Company believes that
Zimmerman has sufficient funds to meet its obligations.
Unrealized Gains
----------------
In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, the Company may carry its portfolio of
fixed income securities either as held to maturity (carried as
amortized cost), as trading securities (carried at fair market
value) or as available-for-sale (carried at fair market value);
the Company has chosen to carry all of its debt securities as
available-for-sale. Primarily as a result of the decline in
interest rates, the Company experienced a change in unrealized
gains of $9.7 million, net of deferred taxes of $1.2 million, in
total stockholders' equity, reflecting a decrease in unrealized
losses from $9.2 million at December 31, 1994 to net unrealized
gains of $.5 million at December 31, 1995. The Company continues
to employ investment strategies to mitigate interest rate and
other market exposures.
OUTLOOK
-------
Business
--------
Although IHC is engaged in sign manufacturing through
Zimmerman, the Company intends to reposition itself as strictly a
financial services company engaged principally in insurance
activities. In that regard, the Company is considering various
- 23 -
<PAGE>
alternative transactions which would result in the divestiture or
significant reduction of the Company's investment in Zimmerman,
although there can be no assurance that any such transactions
would be consummated.
Standard Life intends to continue to focus on its core stop
loss and DBL businesses, while expanding its reinsurance, risk-
sharing and other alliances with HMO's and provider health care
organizations, its POS products, its specialty products such as
its behavioral health carve-out product, and its South and Central
American reinsurance coverage. Standard Life will also seek
actively opportunities to purchase blocks of business, such as the
block of DBL business purchased in early 1996 having premiums of
$1.0 million. Madison Life anticipates focusing on expansion of
its core group and long-term and short-term disability and group
life businesses, together with credit life and credit disability
products. Madison Life stands ready to purchase, on an assumption
reinsurance basis, blocks of business, such as the block of pre-
need individual ordinary life business that Madison Life has
contracted to purchase in 1996, and will seek appropriate
investments in joint ventures involved in managed health care
activities.
The health care industry is one of the largest industries in
the United States. IHC believes that the Insurance Group is well-
positioned to take advantage of the changing health care
environment; the size of the Insurance Subsidiaries affords them
greater flexibility than their larger competitors to develop or
participate in new business opportunities, and their network of
established independent managing general underwriters and agents
affords them broad access to the marketplace.
The Insurance Group will pursue opportunities in managed
health care in addition to the provider reinsurance, POS and
specialty carve-out products mentioned above. The Insurance Group
is participating with physician-hospital organizations, third
party administrators and other provider organizations to develop
provider sponsored community health plans and/or HMO's in target
markets in the United States. A provider sponsored health plan
("PSHP") is a managed care health plan which is co-sponsored by an
insurance company and a select group of providers to serve the
community in the providers' service area. The PSHP integrates the
financing and delivery of health care and is designed to compete
with HMO's and other managed care plans. The Insurance Group
believes that PSHP's which align the risk of the providers and the
insurance company have a greater chance of success, and is working
to establish PSHP's in which the providers and the insurance
company share the financial results of the plan's operations. The
Insurance Group currently has two such plans under development,
one in the Southwest and one in the Northeast. The PSHP's will
initially provide services to the commercial market; however, the
goal is for these entities to access the Medicare and Medicaid
markets either by becoming provider sponsored organizations as
contemplated by proposed legislation before Congress or by
becoming full-fledged HMO's.
- 24 -
<PAGE>
The Insurance Group is focusing its development efforts
relating to PSHP's on smaller, secondary markets. While
opportunities in the urban markets still exist, the competition is
more intense. Market features which the Insurance Group believes
provide the most opportunity include those with the following
characteristics: populations in the range of 100,000 to 1,000,000
(to ensure a sufficient diversity of providers, lessen the cost of
advertising and marketing, and ensure a sufficient number of
enrollees), a favorable regulatory environment, a low managed care
penetration, an overcapacity of acute inpatient bed days, an
oversupply of specialist physicians, and favorable Medicare and
Medicaid populations.
Capital Resources
-----------------
Due to its superior capital ratios, broad licensing and
excellent asset quality and credit-worthiness, the Insurance Group
remains well positioned to increase or diversify its current
activities, and to raise additional capital in the public or
private markets to the extent determined to be necessary or
desirable, in order to pursue acquisition opportunities or
otherwise expand its operations.
New Accounting Pronouncements
-----------------------------
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation"
which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, and allows
either expensing the value of stock-based compensation over the
period earned, or disclosing in the Notes to the Consolidated
Financial Statements the pro forma impact to net income and
earnings per share as if the fair value of the awards had been
charged to compensation expense. The Company has not completed
its analysis of the Statement, nor has it made a determination as
to the expense recognition or disclosure provisions of the
Statement.
- 25 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Index to Consolidated Financial Statements and
Schedules on page 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information required by this Item is incorporated by
reference to "Election of Directors" and "Executive Officers"
in the Company's Proxy Statement for its 1996 Annual Meeting
of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required by this Item is incorporated by
reference to "Executive Compensation" in the Company's Proxy
Statement for its 1996 Annual Meeting of Stockholders, except
that the information required by paragraphs (i), (k) and (l)
of Item 402 Regulation S-K (Section 229.402) and set forth in such
Proxy Statement is specifically not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
---------------------------------------------------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1996 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1996 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
-------------------------------------------------------
(a) (1) and (2) See Index to Consolidated Financial Statements
and Schedules on page 29.
(3) EXHIBITS See Exhibit Index on page 67.
(b) No report on Form 8-K was filed during the quarter ended
December 31, 1995.
- 26 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d)
of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 29, 1996.
INDEPENDENCE HOLDING COMPANY
(REGISTRANT)
By/s/ Edward Netter
-----------------------------
Edward Netter
Chairman and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated as of the 29th day of March, 1996.
/s/ Harold E. Johnson
-----------------------------------
Harold E. Johnson
Director
/s/ Allan C. Kirkman
-----------------------------------
Allan C. Kirkman
Director
/s/ Steven B. Lapin
-----------------------------------
Steven B. Lapin
Director, President and
Chief Operating Officer
- 27 -
<PAGE>
/s/ Donald T. Netter
-----------------------------------
Donald T. Netter
Director,
Senior Vice President - Investments
/s/ Edward Netter
-----------------------------------
Edward Netter
Director, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Edward J. Scheider
-----------------------------------
Edward J. Scheider
Director
/s/ F. Peter Zoch, III
----------------------------------
F. Peter Zoch, III
Director
/s/ Roy T. K. Thung
---------------------------------
Roy T. K. Thung
Director,
Executive Vice President,
Chief Financial Officer and
Treasurer (Principal
Financial Officer)
/s/ Teresa A. Herbert
--------------------------------
Teresa A. Herbert
Vice President and
Controller (Principal
Accounting Officer)
- 28 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGES
- -----
INDEPENDENT AUDITORS' REPORT.............................. 30
CONSOLIDATED FINANCIAL STATEMENTS:
- ----------------------------------
Consolidated Balance Sheets at December 31, 1995
and 1994................................................. 31
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993......................... 32
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1995, 1994 and 1993..... 33
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993......................... 34-35
Notes to Consolidated Financial Statements................ 36-60
SCHEDULES:*
- -----------
Summary of investments - other than investments in
affiliates at December 31, 1995 (Schedule I)............. 61-62
Condensed financial information of parent company
(Schedule III)........................................... 63-65
Supplementary insurance information (Schedule V).......... 66
EXHIBIT INDEX............................................. 67
*All other schedules have been omitted as they are not applicable
or not required, or the information is given in the financial
statements, notes thereto or in other schedules.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INDEPENDENCE HOLDING COMPANY:
We have audited the consolidated financial statements of
Independence Holding Company and subsidiaries as listed in the
accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying index.
These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Independence Holding Company and subsidiaries as of
December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally
accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the Consolidated Financial Statements,
the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" in 1993.
KPMG PEAT MARWICK LLP
New York, New York
March 25, 1996
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents......................$ 26,860,000 $ 20,670,000
Short-term investments......................... 7,376,000 708,000
Securities purchased under agreements to resell
(Note 3)...................................... 5,195,000 18,660,000
Fixed maturities (Note 4)...................... 141,393,000 129,817,000
Equity securities (Note 4)..................... 6,490,000 6,383,000
Other investments (Note 8)..................... 25,413,000 24,288,000
Trade accounts, notes and other receivables.... 4,164,000 2,863,000
Deferred insurance acquisition costs........... 9,156,000 10,979,000
Property, plant and equipment, net (Note 9).... 1,204,000 1,636,000
Due from reinsurers............................ 44,588,000 39,336,000
Due from brokers............................... 1,706,000 596,000
Other assets................................... 5,369,000 4,183,000
Net assets of discontinued operations (Note 2). 7,293,000 6,249,000
----------- -----------
TOTAL ASSETS...............................$286,207,000 $266,368,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits.........................$103,872,000 $ 95,277,000
Unearned premiums.............................. 12,665,000 14,680,000
Funds on deposit............................... 34,463,000 34,436,000
Insurance policy claims (Note 10).............. 5,162,000 4,434,000
Other policyholders' funds..................... 2,071,000 2,161,000
Financial instruments sold, but not yet
purchased (Note 4)............................ 836,000 1,571,000
Due to brokers................................. 22,136,000 22,006,000
Due to reinsurers.............................. 3,946,000 4,225,000
Accounts payable, accruals and other
liabilities................................... 12,423,000 11,993,000
Income taxes, principally deferred (Note 15)... 4,915,000 5,780,000
Long-term debt (Note 11)....................... 12,111,000 14,111,000
----------- -----------
TOTAL LIABILITIES.......................... 214,600,000 210,674,000
----------- -----------
STOCKHOLDERS' EQUITY: (Notes 12 and 13)
Common stock, par value $1 per share (50,000,000
shares authorized; 14,864,549 and 15,528,730
shares issued and outstanding, respectively
net of 4,377,900 shares in treasury)........... 14,865,000 15,529,000
Paid-in capital................................. 68,812,000 69,800,000
Unrealized gains (losses) on investments, net of
deferred taxes (tax benefits) of $321,000 and
($906,000) respectively......................... 495,000 (9,168,000)
Accumulated deficit............................. (12,565,000) (20,467,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................. 71,607,000 55,694,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$286,207,000 $266,368,000
=========== ===========
See accompanying notes to consolidated financial statements.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ---------------------------------------------------------------------------
REVENUES:
Insurance premiums...............$ 56,401,000 $ 50,623,000 $ 47,538,000
Net investment income (Note 6)... 13,885,000 12,708,000 13,008,000
Net realized and unrealized
gains (losses) (Note 7)......... - (1,921,000) 835,000
Equity income (loss)............. (527,000) 437,000 1,288,000
Other income (loss).............. 1,668,000 (343,000) 2,775,000
---------- ---------- ----------
71,427,000 61,504,000 65,444,000
---------- ---------- ----------
EXPENSES:
Insurance benefits, claims and
reserves........................ 37,345,000 32,817,000 34,000,000
Amortization of deferred
insurance acquisition costs..... 3,898,000 5,573,000 6,444,000
Interest expense................. 1,101,000 968,000 92,000
Selling, general and administra-
tive expenses................... 24,311,000 20,473,000 19,276,000
---------- ---------- ----------
66,655,000 59,831,000 59,812,000
---------- ---------- ----------
Operating income before income
taxes........................... 4,772,000 1,673,000 5,632,000
Income tax expense (benefit)
(Note 15)....................... (1,400,000) (723,000) 1,591,000
---------- ---------- ----------
Income from continuing operations 6,172,000 2,396,000 4,041,000
Cumulative effect of accounting
change.......................... - - (340,000)
Income from discontinued
operations, net (Note 2)........ 2,028,000 1,839,000 1,378,000
---------- ---------- ----------
Net income.......................$ 8,200,000 $ 4,235,000 $ 5,079,000
========== ========== ==========
INCOME PER COMMON SHARE:
Income from continuing operations$ .41 $ .15 $ .25
Cumulative effect of accounting
changes......................... - - (.02)
Income from discontinued
operations, net................. .13 .12 .08
---------- ---------- ----------
Net income.......................$ .54 $ .27 $ .31
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING..................... 15,216,000 15,717,000 16,148,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
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<PAGE>
<TABLE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
UNREALIZED GAINS
(LOSSES) ON TOTAL
COMMON STOCK PAID-IN INVESTMENTS, (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL NET DEFICIT) EQUITY
------------------------ --------------------------------------------------------
BALANCE AT DECEMBER 31, 1992......... 16,074,403 $16,074,000 $70,534,000 $ (249,000) $(29,154,000) $57,205,000
Purchase of common stock........ (1,152,553) (1,152,000) (2,207,000) (3,359,000)
Issuance of shares.............. 898,667 899,000 1,762,000 2,661,000
Net change in unrealized gains.. 376,000 376,000
Cumulative effect of accounting
change......................... 340,000 340,000
Net income...................... 5,079,000 5,079,000
Realization of tax benefit of
operating loss carryforwards
subsequent to reorganization... 65,000 65,000
Common stock dividend........... (316,000) (316,000)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1993......... 15,820,517 15,821,000 70,154,000 467,000 (24,391,000) 62,051,000
Purchase of common stock
and warrants................... (291,787) (292,000) (717,000) (1,009,000)
Net change in unrealized gains.. (9,635,000) (9,635,000)
Net income...................... 4,235,000 4,235,000
Realization of tax benefit of
operating loss carryforwards
subsequent to reorganization... 363,000 363,000
Common stock dividend........... (311,000) (311,000)
---------- ---------- ---------- --------- ---------- ----------
BALANCE AT DECEMBER 31, 1994......... 15,528,730 15,529,000 69,800,000 (9,168,000) (20,467,000) 55,694,000
Purchase of common stock
and warrants................... (664,181) (664,000) (1,587,000) (2,251,000)
Net change in unrealized gains.. 9,663,000 9,663,000
Net income...................... 8,200,000 8,200,000
Realization of tax benefit of
operating loss carryforwards
subsequent to reorganization... 599,000 599,000
Common stock dividend........... (298,000) (298,000)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1995......... 14,864,549 $14,865,000 $68,812,000 $ 495,000 $(12,565,000) $71,607,000
========== ========== ========== ========== ========== ==========
</TABLE>
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..........................$ 8,200,000 $ 4,235,000 $ 5,079,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of deferred insurance
acquisition costs................ 3,898,000 5,573,000 6,444,000
Realized losses (gains) on sales
of investment securities........ 44,000 1,787,000 (951,000)
Unrealized losses (gains) on
trading securities............... (44,000) 134,000 116,000
Equity loss (income).............. 527,000 (437,000) (1,288,000)
Depreciation...................... 286,000 276,000 275,000
Deferred taxes (tax benefits)..... (1,586,000) (837,000) 826,000
Income tax benefit credited to
paid-in capital.................. 599,000 363,000 65,000
Cumulative effect of change in
accounting principle............. - - 340,000
Income from discontinued
operations, net.................. (2,028,000) (1,839,000) (1,378,000)
Other............................. 185,000 336,000 106,000
Change in assets and liabilities:
Net sales of trading securities... 188,000 1,643,000 827,000
Increase (decrease) in future
insurance policy benefits, claims
and other policy liabilities..... 11,435,000 (3,301,000) 14,300,000
Additions to deferred insurance
acquisition costs................ (2,075,000) (2,618,000) (6,402,000)
Change in net amounts due from and
to reinsurers.................... (5,531,000) 4,350,000 (4,170,000)
Change in trade accounts, notes
and other receivables............ (1,307,000) (928,000) 289,000
Change in income tax liability.... (507,000) 1,043,000 (749,000)
Other............................. (737,000) 614,000 (4,022,000)
---------- ---------- ----------
Net cash provided by operating
activities....................$11,547,000 $10,394,000 $ 9,707,000
========== ========== ==========
(CONTINUED)
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
1995 1994 1993
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and
to brokers......................$ (980,000) $ 6,167,000 $ 15,625,000
Sales and maturities of short-term
investments..................... 15,933,000 3,859,000 3,345,000
Purchases of short-term
investments..................... (22,609,000) (1,779,000) (5,463,000)
Net sales (purchases) of resale
and repurchase agreements....... 13,465,000 3,027,000 (15,377,000)
Sales of equity securities....... 83,611,000 57,721,000 23,439,000
Purchases of equity securities... (80,668,000) (50,902,000) (18,715,000)
Sales and maturities of fixed
maturities...................... 238,304,000 141,213,000 140,414,000
Purchases of fixed maturities....(243,118,000) (161,859,000) (145,471,000)
Proceeds on sale of other
investments..................... 5,539,000 2,930,000 1,682,000
Distributions from other
investments, net of additional
investments..................... (7,217,000) (2,388,000) (696,000)
Discontinued operations, net..... 984,000 78,000 1,620,000
Other............................ 151,000 (114,000) (14,000)
----------- ----------- -----------
Net cash provided (used) by
investing activities........ 3,395,000 (2,047,000) 389,000
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock......... - - 25,000
Repurchase of common stock and
warrants........................ (2,251,000) (1,009,000) (3,359,000)
Payments of investment-type
insurance contracts............. (4,190,000) (4,802,000) (4,294,000)
Increase in long-term debt....... - - 15,000,000
Repayment of long-term debt...... (2,000,000) (1,050,000) -
Dividends paid................... (311,000) (316,000) (321,000)
----------- ----------- -----------
Net cash provided (used) by
financing activities........ (8,752,000) (7,177,000) 7,051,000
----------- ----------- -----------
Increase in cash and cash
equivalents..................... 6,190,000 1,170,000 17,147,000
Cash and cash equivalents,
beginning of year............... 20,670,000 19,500,000 2,353,000
----------- ----------- -----------
Cash and cash equivalents,
end of year.....................$ 26,860,000 $ 20,670,000 $ 19,500,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company and subsidiaries (the "Company
or "IHC") is a financial services company engaged primarily in
insurance activities through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their affiliates (the "Insurance Group").
IHC is also engaged in sign manufacturing through its
majority-owned subsidiary, Zimmerman Sign Company ("Zimmerman").
The Company intends, however, to reposition itself as strictly a
financial services company. In that regard, the Company is
considering various alternative transactions which would result in
the divestiture or significant reduction of the Company's
investment in Zimmerman, although there can be no assurance that
any such transactions would be consummated. The Consolidated
Financial Statements of IHC and notes thereto have been restated
to present Zimmerman as discontinued operations.
Geneve Corporation, a diversified financial holding company,
and its affiliated entities ("Geneve") hold approximately 55% of
IHC's outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF FINANCIAL
STATEMENTS
The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles and
include the accounts of IHC and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Investments in partnerships which are not consolidated are carried
on the equity method, which approximates the Company's equity in
their underlying net assets.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect: (i) the reported
amounts of assets and liabilities, (ii) the disclosure of
contingent assets and liabilities at the date of the financial
statements and (iii) the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
(C) RECLASSIFICATION
Certain amounts in prior years' Consolidated Financial
Statements and notes thereto have been restated to conform to the
1995 presentation.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost which approximates
market value and include principally interest-bearing deposits at
brokers, money market instruments and U.S. Treasury securities of
less than 91-day maturity. Investments with original maturities of
91-days to 1 year are considered short-term investments and are
carried at cost which approximates market.
(E) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell ("resale
agreements") and securities sold under agreements to repurchase
("repurchase agreements") are treated as financing transactions
and are carried at the amounts at which the securities will be
subsequently resold or repurchased as specified in the agreements.
(F) INVESTMENTS IN SECURITIES
(i) Investments in fixed income securities (bonds, notes and
redeemable preferred stock), equity securities, and derivatives
(options and options on futures contracts) are valued as
prescribed by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The Company elected to adopt SFAS No. 115 by
reporting the cumulative effect of the change in accounting method
at December 31, 1993 for those securities which were previously
classified as trading. Investments in equity and fixed income
securities are carried as follows:
(a) Fixed income securities which are being held to
maturity ("held to maturity") are carried at amortized cost.
(b) Securities which are held for trading purposes are
carried at estimated market value ("market value" or "market").
Unrealized gains or losses are credited or charged, as
appropriate, to the Consolidated Statements of Operations.
(c) Securities which may or may not be held to maturity
("available-for-sale") are carried at market value. Unrealized
gains or losses, net of deferred income taxes, are credited or
charged, as appropriate, directly to stockholders' equity.
Realized gains and losses on sales of available-for-sale
securities, and unrealized losses considered to be other than
temporary, are credited or charged to the Consolidated Statements
of Operations.
(ii) Financial instruments sold, but not yet purchased,
represent obligations to replace borrowed securities that have
been sold. Such transactions occur in anticipation of declines in
the market value of the securities. The Company's risk is an
increase in the market value of the securities sold in excess of
the consideration received, but that risk is mitigated as a result
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
of relationships to certain securities owned. Unrealized gains or
losses on open transactions are credited or charged, as
appropriate, to the Consolidated Statements of Operations.
While the transaction is open, the Company will also incur an
expense for any accrued dividends or interest payable to the
lender of the securities. When the transaction is closed, the
Company realizes a gain or loss in an amount equal to the
difference between the price at which the securities were sold and
the cost of replacing the borrowed securities.
(iii) Gains or losses on sales of securities are determined
on the basis of specific identification.
(iv) The Company enters into derivative financial
instruments, primarily put and call option contracts on interest
rate futures contracts, to hedge portions of the Company's fixed
income portfolio intended to minimize loss of principal in a
rapidly changing interest rate environment. The contracts are all
readily marketable and are carried on the Consolidated Balance
Sheets at their current market value with changes in unrealized
gains or losses, net of deferred income taxes, credited or charged
as appropriate directly to stockholders' equity or to the
Consolidated Statement of Operations, with all realized gains and
losses reflected currently in the Consolidated Statement of
Operations.
(G) PARTNERSHIPS
Partnerships primarily consist of investments in relatively
"market neutral" arbitrage strategies, and all securities held by
these funds are carried at market value. The Company also has a
partnership investment engaged in venture capital activities
including leveraged buyout transactions, and investments of this
partnership are carried at fair value; when available, fair value
is determined by reference to market price quotations. When
market price quotations are not available for this partnership (as
is the case for principally all of the securities currently held
by such partnership), fair value of the securities is determined
by the general partner of such partnership. Unrealized
appreciation or depreciation is recorded in equity income in the
Consolidated Statements of Operations. All other partnership
investments are carried on the equity method.
(H) MORTGAGE LOANS AND POLICY LOANS
Mortgage loans are primarily stated at amortized cost and
policy loans are stated at their aggregate unpaid balances.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(I) DEFERRED INSURANCE ACQUISITION COSTS
The costs of acquiring new insurance business, principally
commissions and certain variable underwriting, agency and policy
issuance expenses, have been deferred and are being amortized,
with interest, over the premium paying period of the related
insurance policies in proportion to the ratio of the annual
premium revenue to the total anticipated premium revenue.
Anticipated premium revenue was estimated using assumptions as to
mortality (morbidity on health insurance) and withdrawals
consistent with those used in calculating future insurance policy
benefits. Credit life and credit accident and health deferred
insurance acquisition costs are amortized proportionally over the
period during which the premium is earned. Deferred insurance
acquisition costs are periodically reviewed to determine
recoverability from future income, including investment income,
and, if not recoverable, are charged to expense.
(J) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost.
Improvements are capitalized while repair and maintenance costs
are charged to operations as incurred. Depreciation of property,
plant and equipment has been provided on the straight-line method
over the estimated useful lives of the respective assets.
Amortization of leasehold improvements has been provided on the
straight-line method over the shorter of the lease term or the
estimated useful life of the asset.
(K) FUTURE POLICY BENEFITS
Liabilities for future insurance policy benefits, including
dividends on future participating policies, have been computed
primarily using the net level premium method based on anticipated
investment yield, mortality (morbidity on health insurance) and
withdrawals. Life reserve interest rates are generally graded and
range from 2% to 9% per annum. Withdrawals are based on
experience.
Future policy benefits consist of the following at December
31, 1995 and 1994:
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Life........................... $ 53,030 $ 49,980
Accident and health............ 50,842 45,297
------- -------
$103,872 $ 95,277
======= =======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(L) FUNDS ON DEPOSIT
Funds received for certain long-duration contracts
(principally annuities) are credited directly to a policyholder
liability account, funds on deposit. Withdrawals are recorded
directly as a reduction of respective policyholders' funds on
deposit. Amounts on deposit were credited at an annual rate of
5.0% to 13.9% in 1995 and 1994.
(M) INSURANCE PREMIUM REVENUE RECOGNITION
Insurance premiums, including reinsurance premiums assumed,
are recognized as revenue over the premium paying period of the
policies. Credit life and health premiums are recognized over the
terms of the policy.
(N) PARTICIPATING POLICIES
Participating policies represent 6.6%, 7.8%, and 8.6% of the
individual life insurance in-force and 2.0%, 2.6%, and 3.1% of the
gross premium income, as of and for the years ended December 31,
1995, 1994 and 1993, respectively, and provide for the payment of
dividends. Dividends to policyholders are determined annually and
are payable only upon declaration by the Board of Directors of the
insurance companies. With respect to Standard Life, New York
State Insurance Department requirements limit the amount of profit
on participating policies which can inure to stockholders to 10%
of such profits or $.50 per year per $1,000 of such insurance in-
force, whichever is greater. At December 31, 1995, the
stockholder's equity of the insurance companies was not restricted
because of participating policyholders' surplus.
(O) DEFERRED INCOME TAXES
The provision for deferred income taxes is based on the
liability method prescribed by SFAS No. 109, "Accounting for
Income Taxes" and represents the change in the Company's deferred
income tax liability during the year, less amounts accounted for
in equity, including the effect of enacted tax rate changes.
Deferred income taxes arise from temporary differences between the
tax bases of assets and liabilities and their reported amounts in
the Consolidated Financial Statements.
(P) INCOME PER COMMON SHARE
The computation of income per common share for each of the
three years ended December 31, 1995, 1994 and 1993 is based upon
the weighted average number of common and dilutive common
equivalent shares outstanding of approximately 15,216,000,
15,717,000, and 16,148,000, respectively. Dilutive common
equivalent shares for 1995 include 22,000 shares from the assumed
exercise of options using the treasury stock method. Fully diluted
- 40 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
earnings per share is not shown as the assumed exercise of all
other stock options and warrants is anti-dilutive.
(Q) REINSURANCE
The Company's Consolidated Financial Statements for 1993
reflect the adoption of SFAS No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts."
Pursuant to SFAS No. 113, amounts paid for or recoverable under
reinsurance contracts, including amounts previously reported as a
reduction of various liability accounts as permitted under
previous accounting standards, are included in total assets as
reinsurance balances, or reinsurance prepaid. The cost of
reinsurance related to long-duration contracts is accounted for
over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the
underlying policies.
(R) NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation"
which is effective for fiscal years beginning after December 15,
1995. SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans, and allows
either expensing the value of stock-based compensation over the
period earned, or disclosing in the Notes to Consolidated
Financial Statements the pro forma impact to net income and
earnings per share as if the fair value of the awards had been
charged to compensation expense. The Company has not completed its
analysis of the Statement, nor has it made a determination as to
the expense recognition or disclosure provisions of the statement.
NOTE 2. DISCONTINUED OPERATIONS
Although IHC is engaged in sign manufacturing through
Zimmerman, the Company intends to reposition itself as strictly a
financial services company engaged principally in insurance
activities. In that regard, the Company is considering various
alternative transactions which would result in the divestiture or
significant reduction of the Company's investment in Zimmerman,
although there can be no assurance that any such transactions
would be consummated.
Since Zimmerman has historically comprised all of IHC's
manufacturing segment, the Consolidated Financial Statements and
notes thereto of IHC have been restated to present Zimmerman as
discontinued operations.
- 41 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
The net assets of Zimmerman have been reclassified in the
Consolidated Balance Sheets as follows:
DECEMBER 31,
1995 1994
---------------------
(DOLLARS IN THOUSANDS)
Accounts receivable........... $ 9,284 $ 7,727
Inventories................... 12,659 10,497
Other assets.................. 3,938 4,015
Accounts payable and
liabilities including
minority interest............ (8,899) (8,842)
Long-term debt................ (9,689) (7,148)
------ ------
Net assets of discontinued
operations................... $ 7,293 $ 6,249
====== ======
Income from discontinued operations for the years ended
December 31, 1995, 1994 and 1993 is summarized as follows:
1995 1994 1993
----------------------------
(DOLLARS IN THOUSANDS)
Revenues.................. $41,669 $36,415 $33,001
====== ====== ======
Operating income from
discontinued operations,
net of minority interest. $ 3,280 $ 2,958 $ 2,215
Income taxes.............. 1,252 1,119 837
------ ------ ------
Net income from
discontinued operations.. $ 2,028 $ 1,839 $ 1,378
====== ====== ======
Zimmerman is included in the consolidated federal income tax
return filed by IHC. On a separate company basis, Zimmerman has
a tax sharing agreement with IHC; accordingly, discontinued
operations are shown net of applicable taxes in accordance with
such agreement.
NOTE 3. RESALE AGREEMENTS
Resale agreements are utilized to invest excess funds on a
short-term basis. At December 31, 1995, the Company had
approximately $5,195,000 in resale agreements outstanding, all of
which settled by January 2, 1996 and were subsequently reinvested.
The Company takes possession of securities purchased under resale
agreements and values the collateral on a daily basis to protect
the Company in the event of default by the counterparty. The
principal counterparty for the resale agreements at December 31,
1995 was UBS Securities, Inc.
- 42 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES
The Company adopted SFAS No. 115 at December 31, 1993. The
cumulative effect of this change in accounting for equity and
fixed income securities was a loss of $340,000, net of income
taxes of $175,000, and was reported separately in the Consolidated
Statement of Operations for the year ended December 31, 1993.
DECEMBER 31, 1995
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities.....$ 28,805 $ 448 $ (767) $ 28,486
U.S. Government and
agencies obligations.... 43,496 941 (6) 44,431
Government National
Mortgage Association... 66,361 496 (5) 66,852
Obligations of states
and political
subdivisions........... 1,620 44 (40) 1,624
------- ------- ------- -------
Total fixed maturities $140,282 $ 1,929 $ (818) $141,393
======= ======= ======= =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common stock.............$ 988 $ 6 $ (235) $ 759
Preferred stock.......... 4,516 150 (97) 4,569
------- ------- ------- -------
5,504 156 (332) 5,328
------- ------- ------- -------
TRADING:
Common stock............. 1,137 4 (130) 1,011
Preferred stock.......... 151 - - 151
------- ------- ------- -------
1,288 4 (130) 1,162
------- ------- ------- -------
Total equity securities $ 6,792 $ 160 $ (462) $ 6,490
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- ---------------------------
TRADING:
Common stock............ $ (752) $ 36 $ (119) $ (835)
Options.................. (2) 1 - (1)
------- ------- ------- -------
Total financial instruments
sold, but not yet
purchased $ (754) $ 37 $ (119) $ (836)
======= ======= ======= =======
- 43 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1994
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS (LOSSES) VALUE
--------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities.....$ 34,590 $ 6 $ (4,035) $ 30,561
U.S. Government and
agencies obligations.... 46,885 - (2,781) 44,104
Government National
Mortgage Association.... 54,658 - (1,790) 52,868
Obligations of states
and political sub-
divisions............... 2,422 11 (149) 2,284
------- ------- ------- -------
Total fixed maturities $138,555 $ 17 $ (8,755) $129,817
======= ======= ======= =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common Stock.............$ 2,713 $ 41 $ (309) $ 2,445
Preferred Stock.......... 2,241 - (327) 1,914
Options.................. 1,471 - (844) 627
------- ------- ------ -------
6,425 41 (1,480) 4,986
------- ------- ------ -------
TRADING:
Common Stock............. 1,420 - (41) 1,379
Options.................. 80 - (62) 18
------- ------- ------- -------
1,500 - (103) 1,397
------- ------- -------- -------
Total equity securities $ 7,925 $ 41 $ (1,583) $ 6,383
======= ======= ======== =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
TRADING:
Common Stock............. (1,044) - (67) (1,111)
Options.................. (597) 137 - (460)
------- ------- ------ -------
Total financial instruments
sold, but not yet
purchased $ (1,641) $ 137 $ (67) $ (1,571)
======= ======= ======= =======
The average market value of trading options sold, but not yet
purchased was $21,000 for 1995.
The average market value of trading long options was $36,000
and the average market value of trading options sold, but not yet
purchased was $26,000 for 1994.
-44-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and market value of fixed income
securities at December 31, 1995, by contractual maturity, are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
DECEMBER 31, 1995
-----------------------
AMORTIZED MARKET
COST VALUE
-----------------------
(DOLLARS IN THOUSANDS)
Due in one year or less..............$ 1,590 $ 1,585
Due after one year through
five years.......................... 2,169 2,254
Due after five years through
ten years........................... 47,681 48,523
Due after ten years.................. 22,481 22,179
------- -------
73,921 74,541
Government National Mortgage
Association......................... 66,361 66,852
------- -------
$140,282 $141,393
======= =======
Approximately $9,543,000 of gross gains and $9,783,000 of
gross losses were realized on sales of available-for-sale
securities for the year ended December 31, 1995.
Approximately $2,507,000 of losses were realized on sales of
options held for sale, $48,000 of losses were realized on options
held for trading and $1,286,000 of losses were realized on sales
of future contracts held for sale for the year ended December 31,
1995.
Approximately $9,061,000 of gross gains and $10,981,000 of
gross losses were realized on sales of available-for-sale
securities for the year ended December 31, 1994.
Approximately $2,256,000 of gains were realized on sales of
options held for sale, $52,000 of gains were realized on options
held for trading and $223,000 of gains were realized on sales of
future contracts held for sale for the year ended December 31,
1994.
Approximately $5,845,000 of gross gains and $5,352,000 of
gross losses were realized on sales of available-for-sale
securities for the year ended December 31, 1993.
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of financial instruments not disclosed elsewhere in
the notes (see Note 1 for Investments in Securities):
- 45 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
(CONTINUED)
A. MORTGAGE LOANS
The fair value of mortgage loans is calculated by discounting
the scheduled cash flows at a current market interest rate
adjusted for credit risk.
B. POLICY LOANS
The fair value of policy loans is calculated by projecting
the current policy loans in the aggregate to the end of the
expected lifetime period of the life insurance business at the
average policy loan rates and discounting them at a current market
policy loan interest rate.
C. FUNDS ON DEPOSIT
The Company has two types of annuity policies. The first type
is a deferred annuity which is credited with a current market
interest rate, resulting in a carrying value which equals fair
value. The second type of annuity carries fixed interest rates
which are currently higher than current market interest rates. The
fair value of these annuities was determined by discounting the
annuity payments using current market interest rates.
D. LONG-TERM DEBT OF SUBSIDIARIES
The fair value of long-term debt is determined to equal
carrying value as all debt outstanding carries interest rates
which are based on prime rates or rates which approximate current
market interest rates.
The estimated fair values of financial instruments are as
follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------- ----------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Fixed maturities.....$141,393 $141,393 $129,817 $129,817
Equity securities....$ 6,490 $ 6,490 $ 6,383 $ 6,383
Mortgage loans.......$ 441 $ 527 $ 641 $ 731
Policy loans.........$ 5,154 $ 4,412 $ 4,454 $ 3,212
- 46 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
(CONTINUED)
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------- ----------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FINANCIAL LIABILITIES:
Funds on deposit.... $ 34,463 $ 38,231 $ 34,436 $ 37,525
Financial instruments
sold, but not yet
purchased...........$ 836 $ 836 $ 1,571 $ 1,571
Long-term borrowings.$ 12,111 $ 12,111 $ 14,111 $ 14,111
NOTE 6. NET INVESTMENT INCOME
Major categories of net investment income for the years ended
December 31, 1995, 1994 and 1993 are summarized as follows:
1995 1994 1993
------------------------------
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDENDS:
Fixed income securities....$ 9,347 $ 9,646 $ 9,839
Equity securities.......... 681 967 1,511
Short-term investments..... 1,371 653 485
Other...................... 441 674 616
------ ------ ------
11,840 11,940 12,451
Investment income from
partnerships................. 2,257 1,189 919
Investment expenses........... (212) (421) (362)
------ ------ ------
NET INVESTMENT INCOME........$13,885 $12,708 $13,008
====== ====== ======
NOTE 7. NET REALIZED AND UNREALIZED GAINS
Net realized and unrealized gains (losses) on investments for
the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
----------------------------
(DOLLARS IN THOUSANDS)
Net realized gains (losses) ..$ (44) $(1,787) $ 951
Net unrealized gains
(losses)..................... 44 (134) (116)
------ ------ ------
NET REALIZED AND UNREALIZED
GAINS (LOSSES)...............$ - $(1,921) $ 835
====== ====== ======
- 47 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
NOTE 8. OTHER INVESTMENTS
Other investments consist of the following at December 31,
1995 and 1994:
DECEMBER 31,
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Partnership interests.................$18,889 $18,222
Mortgage loans........................ 441 641
Policy loans.......................... 5,154 4,454
Real estate........................... 929 971
------ ------
$25,413 $24,288
====== ======
At December 31, 1995, the Company had an investment of
approximately $4,086,000 in a limited partnership which invests
primarily in relatively "market neutral" strategies, such as risk
arbitrage and convertible arbitrage. In addition, the Company had
an investment of $12,161,000 in another limited partnership which
invests primarily in "market neutral" strategies such as equity
arbitrage in the utility sector.
NOTE 9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net at December 31, 1995 and
1994 are as follows:
DECEMBER 31,
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Land..................................$ - $ 93
Buildings............................. - 725
Office equipment...................... 526 494
Leasehold improvements................ 603 697
Office furniture and fixtures......... 1,258 1,029
------ ------
2,387 3,038
Less accumulated depreciation
and amortization.................... (1,183) (1,402)
------ ------
Property, plant and equipment,
net.................................$ 1,204 $ 1,636
====== ======
NOTE 10. LIABILITY FOR UNPAID CLAIMS
The liability for unpaid claims and claim adjustment expenses
represents amounts needed to provide for the estimated cost of
settling claims relating to insured events that have been incurred
prior to the balance sheet date which have not yet been settled.
- 48 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
NOTE 10. LIABILITY FOR UNPAID CLAIMS (CONTINUED)
The change in the liability for unpaid claims and claim
adjustment expenses for the Company's health and disability
coverages is as follows:
DECEMBER 31,
1995 1994 1993
-------------------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year..$ 1,815 $ 2,558 $ 1,839
Less: reinsurance
recoverables................. 327 719 427
------ ------ ------
Net balance at beginning
of year...................... 1,488 1,839 1,412
Amount incurred: ------ ------ ------
Current year.................. 20,234 19,612 16,787
Prior years................... 4,530 3,124 5,073
------ ------ ------
Total....................... 24,764 22,736 21,860
------ ------ ------
Amount paid, related to:
Current year.................. 14,490 14,662 13,050
Prior years................... 8,890 8,425 8,383
------ ------ ------
Total....................... 23,380 23,087 21,433
------ ------ ------
Net balance end of year....... 2,872 1,488 1,839
Plus: reinsurance recoverables 531 327 719
------ ------ ------
Balance at end of year........ 3,403 1,815 2,558
Unpaid life claims............ 1,759 2,619 1,846
------ ------ ------
Total insurance policy claims.$ 5,162 $ 4,434 $ 4,404
====== ====== ======
The schedule above reflects the due and unpaid, in the course
of settlement and incurred but not reported components of the
unpaid claims reserves for the Company's health and disability
coverages. Unpaid claims reserves recorded in future policy
benefits, which represent the present value of amounts not yet due
on claims, are not reflected in the above schedule.
NOTE 11. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1994 is as follows:
DECEMBER 31,
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Credit agreement at Eurodollar
rate plus 1.75%.......................$12,000 $14,000
Other borrowings at a 7% annual
interest rate......................... 111 111
------ ------
$12,111 $14,111
====== ======
- 49 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 11. LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt at December 31,
1995 are as follows:
DOLLARS IN THOUSANDS
1996..............$ 4,022
1997.............. 4,022
1998.............. 4,022
1999.............. 22
2000.............. 23
------
Total $12,111
======
Cash payments for interest were approximately $1,241,000,
$687,000, and $143,000, for the years ended December 31, 1995,
1994 and 1993, respectively.
On December 30, 1993, a subsidiary of the Company entered
into a $15,000,000 credit agreement ("Credit Agreement") to
provide additional capital for the Insurance Group of which
$3,000,000 was repaid through December 31, 1995. Under terms of
the Credit Agreement, interest on the outstanding portion of the
$15,000,000 loan is, at the option of the Company, based on either
(i) 1/4% plus the higher of the prime rate or the Federal Funds
Rate plus 1.0% or (ii) the Eurodollar Rate plus 1-3/4%. The Credit
Agreement (1) contains restrictions with respect to, among other
things, the creation of additional indebtedness, the consolidation
or merger with or into certain corporations, the payment of
dividends and the retirement of capital stock, (2) requires the
maintenance of minimum amounts of net worth, as defined, certain
financial ratios, and certain investment restrictions and (3) is
secured by the stock of two of the Company's subsidiaries and a
$15,000,000 contribution note of Madison Life. The weighted
average annual interest rate on the Credit Agreement was 7.69% and
7.68% at December 31, 1995 and 1994 respectively.
NOTE 12. PREFERRED STOCK
IHC is authorized to issue up to 20,000,000 shares of
preferred stock, par value $1.00 per share.
NOTE 13. COMMON STOCK
(A) IHC has reserved 5,193,128 shares of common stock for shares
issuable under its stock option plan and outstanding warrants at
December 31, 1995.
(B) During 1991, IHC announced a plan to repurchase shares of its
common stock and warrants. Any shares repurchased through this
program may, at the discretion of management, be retired. For the
- 50 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 13. COMMON STOCK (CONTINUED)
year ended December 31, 1995, 664,181 common shares were
repurchased at a cost of $2,251,000. Since the inception of the
repurchase plan through December 31, 1995, 4,260,432 common shares
have been repurchased at a cost of $10,935,000. All of such
repurchased shares have either been retired or reissued.
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS
(A) STOCK OPTIONS
On May 25, 1988, the stockholders approved the amended and
restated Stock Option and Incentive Stock Option Plan under which
1,600,000 shares of common stock were reserved for options and
other common stock awards to be granted under the plan. Under the
terms of the plan, exercise prices are equal to the quoted market
value of the shares at the date of grant. Further, the options
will expire ten years from the date of the grant and will vest
ratably over a three-year period beginning on the first
anniversary of the date of grant.
The following summarizes stock option information for the
years ended December 31, 1995, 1994 and 1993:
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------------------------
OPTIONS OUTSTANDING AT:
December 31, 1995.............632,500 $1.25 - $6.25
Issued....................601,500 $3.16 - $3.84
Cancelled................. 6,000 $3.19 - $3.28
December 31, 1994............. 37,000 $1.25 - $6.25
Issued.................... 5,000 $3.19
December 31, 1993............. 32,000 $1.25 - $6.25
Issued.................... 3,000 $2.88
Exercised................. 20,000 $1.25
December 31, 1992............. 49,000 $1.25 - $6.25
OPTIONS WERE EXERCISABLE AT:
December 31, 1995............ 40,000 $1.25 - $6.25
December 31, 1994............ 32,000 $1.25 - $6.25
December 31, 1993............ 29,000 $1.25 - $6.25
At December 31, 1995, options to purchase 929,884 shares were
available for future grant under the plan.
- 51 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS
(CONTINUED)
(B) SHARE PURCHASE WARRANTS
At December 31, 1995, 1,287,294 share purchase warrants were
outstanding, which are exercisable through June 30, 2001, at
$25.00 for 2.822 shares of common stock. Such warrants are
exercisable for a maximum of 3,632,744 shares of common stock.
For the year ended December 31, 1995, the Company purchased
19,750 warrants at a cost of approximately $4,000. Since the
inception of the repurchase plan through December 31, 1995,
404,491 warrants have been repurchased at a cost of $131,000. All
of such repurchased warrants have been retired.
NOTE 15. INCOME TAXES
The provision for income tax expense (benefit) for the years
ended December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---------------------------------
(DOLLARS IN THOUSANDS)
CURRENT:
U.S. Federal..........$ (45) $ (5) $ 162
State and Local....... 231 119 603
------ ------ ------
186 114 765
------ ------ ------
DEFERRED:
U.S. Federal.......... (1,415) (795) 1,029
State and Local....... (171) (42) (203)
------ ------ ------
(1,586) (837) 826
------ ------ ------
Income tax expense
(benefit)............ $(1,400) $ (723) $ 1,591
====== ====== ======
The Federal statutory rate of 34% in 1995, 1994 and 1993 is
reconciled to the Company's effective income tax rate as follows:
1995 1994 1993
--------------------------------
(DOLLARS IN THOUSANDS)
Tax computed at the
the statutory rate...$ 1,623 $ 569 $ 1,915
Dividends received
deduction and tax
exempt interest...... (198) (292) (226)
Special life insurance
statutory deductions. (918) (716) (245)
State income taxes, net
of Federal effect.... (24) 29 192
- 52 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
1995 1994 1993
---------------------------------
(DOLLARS IN THOUSANDS)
Tax loss carryforwards
recognized for
financial reporting
purposes............. (1,733) (1,256) (901)
Expenses not taxed.... - - 538
Valuation allowance... (132) 1,279 -
Other, net............ (18) (336) 318
------ ------ ------
Income tax expense
(benefit)............$(1,400) $ (723) $ 1,591
====== ====== ======
The tax provision for the year ended December 31, 1995
allocated to stockholders' equity for unrealized gains on
investment securities was $1,227,000.
Temporary differences between the Consolidated Financial
Statement carrying amounts and tax bases of assets and liabilities
that give rise to the deferred tax assets and liabilities at
December 31, 1995 and 1994 relate to the following:
DECEMBER 31,
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
DEFERRED TAX ASSETS:
Loss carryforwards...........$ 5,311 $ 9,923
Other investments............ 511 306
Unrealized losses on
investment securities....... - 3,450
Deferred insurance policy
acquisition costs........... 880 800
Future insurance policy
benefits.................... 1,476 1,174
Other........................ 3,092 2,768
------- -------
Total gross deferred
tax assets.................. 11,270 18,421
Less valuation allowance..... (8,552) (15,700)
------- -------
Net deferred tax assets...... 2,718 2,721
------- -------
DEFERRED TAX LIABILITIES:
Other investments............ 285 759
Unrealized gains on
investment securities....... 258 -
Deferred insurance policy
acquisition costs........... 3,040 3,435
- 53 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
DECEMBER 31,
1995 1994
----------------------
(DOLLARS IN THOUSANDS)
Future insurance policy
benefits.................... 1,308 1,093
Other........................ 943 929
------- -------
Total gross deferred
tax liabilities......... 5,834 6,216
------- -------
Net deferred tax
liability...............$ (3,116) $ (3,495)
======= =======
The $7,148,000 decrease in the valuation allowance for the
year ended December 31, 1995 is primarily attributable to net
changes in loss carryforwards and unrealized gains on investment
securities.
In 1988, the Company adopted SFAS No. 96 retroactive to
January 1, 1987. Accordingly, tax benefits of net operating loss
carryforwards that existed as of the date of the quasi-
reorganization were recognized in 1988 and 1987 as a reduction of
income tax expense. In September 1989, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 86
in which the SEC stated that registrants may no longer treat the
tax benefits of such net operating loss carryforwards as
prescribed by SFAS No. 96. Under SAB No. 86, which was adopted
prospectively in 1989, registrants are required to record a charge
in lieu of Federal income taxes in the Consolidated Statement of
Operations with a corresponding credit to paid-in capital. For the
years ended December 31, 1995, 1994 and 1993, the Company recorded
$599,000, $363,000 and $65,000, respectively, in accordance with
SAB No. 86. There is no impact on consolidated stockholders'
equity related to the adoption of SAB No. 86. At December 31,
1995 there are no remaining tax benefits to be recognized for net
operating loss carryforwards under SAB No. 86.
At December 31, 1995, IHC had net operating loss
carryforwards of approximately $9,500,000 on a tax return basis.
In addition, a subsidiary of IHC had available, on a separate
return basis, acquired net operating loss carryforwards of
approximately $5,700,000 on a tax return basis.
The utilization of acquired net operating loss carryforwards
is limited in any one year to the lesser of (i) IHC's consolidated
taxable income or (ii) the subsidiary's taxable income computed on
a separate return basis.
- 54 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
The net operating losses with their expiration dates are as
follows:
CONSOLIDATED SEPARATE
RETURN RETURN
------------ ----------
EXPIRATION DATE (DOLLARS IN THOUSANDS)
1996..........................$ - $ 400
1997.......................... - 1,000
1998.......................... - 2,500
1999.......................... - 1,800
2005.......................... 9,200 -
2008.......................... 300 -
The Company files a consolidated Federal income tax return
on a June 30 fiscal year. On July 1, 1993, the Insurance Group
became included in the Company's consolidated Federal income tax
return. For all prior tax periods, the Insurance Group has filed
separate Federal income tax returns, except for the period from
July 1, 1989 through March 22, 1991 when Standard Life and its
subsidiaries were included in the Company's consolidated Federal
income tax return as the result of an election made by the
Company.
Under provisions of the Life Insurance Company Tax Act of
1959, certain special deductions were allowed life insurance
companies for Federal income tax purposes and were accumulated in
a memorandum tax account designated as "policyholders'
surplus." Distributions of the untaxed amounts in this account
will result in the Company incurring an additional tax. The
Company has provided through its income tax provision on
operations a tax expense of $1,122,000 in 1992 and prior years
for this additional tax related to the policyholders' surplus
account. A deferred tax liability of approximately $936,000
related to the $2,753,000 remaining balance of the policyholders'
surplus account has not been recognized. This liability will be
recognized when the Company expects that a transaction will occur
which will give rise to a tax on the remaining balance of the
policyholders' surplus account.
Net cash payments (refunds) for income taxes were
approximately $1,355,000, $(200,000), and $2,508,000 in 1995,
1994 and 1993, respectively.
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
Certain subsidiaries of IHC are obligated under non-
cancelable lease agreements for office space. Total rental
expense for the years 1995, 1994 and 1993 for operating leases
was approximately $643,000, $581,000 and $536,000, respectively.
- 55 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
The approximate minimum annual rental expense for operating
leases that have remaining non-cancelable lease terms in excess
of one year at December 31, 1995 are as follows:
DOLLARS IN THOUSANDS
--------------------
1996..............$ 554
1997.............. 563
1998.............. 574
1999.............. 548
2000.............. 486
Thereafter........ 673
-----
Total $3,398
=====
The Company does not provide any post-retirement benefits to
its employees.
At December 31, 1995, the Company had no investment
securities of any one issuer or in any one industry which
exceeded 10% of stockholders equity, except for investments in
obligations of the U.S. Government and its agencies.
A subsidiary of IHC is committed to invest up to $210,000 in
partnership investments.
NOTE 17. REINSURANCE
Standard Life and Madison Life reinsure portions of certain
risks that they underwrite in order to limit the assumption of
disproportionate risks. Standard Life and Madison Life retain
varying amounts of individual life or group life insurance up to
a maximum on any one life of $210,000 and $25,000, respectively.
Amounts not retained are ceded to other companies on an automatic
or facultative basis. Standard Life and Madison Life are
contingently liable with respect to reinsurance in the unlikely
event the assuming reinsurers are unable to meet their
obligations. In addition, Standard Life and Madison Life
participate in various coinsurance treaties. Due to the actuarial
probability of the risks assumed, the net risks assumed by
Standard Life and Madison Life through the above-mentioned
reinsurance are not considered material contingent liabilities.
The effect of reinsurance on benefits to policyholders and
premiums earned is as follows:
- 56 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 17. REINSURANCE (CONTINUED)
ASSUMED CEDED
DIRECT FROM OTHER TO OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------------------------------------------------
(DOLLARS IN THOUSANDS)
BENEFITS TO POLICYHOLDERS:
DECEMBER 31, 1995 $81,930 $ 6,370 $53,069 $35,231 18.1%
DECEMBER 31, 1994 $81,631 $ 6,293 $52,893 $35,031 18.0%
DECEMBER 31, 1993 $63,003 $ 7,570 $34,551 $36,022 21.0%
PREMIUMS EARNED:
DECEMBER 31, 1995
Life........... $ 16,030 $ 2,821 $ 6,530 $ 12,321 22.9%
Health......... 111,154 3,686 70,760 44,080 8.4%
------- ------- ------- -------
$127,184 $ 6,507 $ 77,290 $ 56,401 11.5%
======= ======= ======= =======
DECEMBER 31, 1994
Life........... $ 13,768 $ 3,270 $ 5,620 $ 11,418 28.6%
Health......... 103,008 2,404 66,207 39,205 6.1%
------- ------- ------- -------
$116,776 $ 5,674 $ 71,827 $ 50,623 11.2%
======= ======= ======= =======
DECEMBER 31, 1993
Life........... $ 11,425 $ 4,965 $ 3,923 $ 12,467 39.8%
Health......... 88,875 2,061 55,865 35,071 5.9%
------- ------- ------- -------
$100,300 $ 7,026 $ 59,788 $ 47,538 14.8%
======= ======= ======= =======
NOTE 18. SEGMENT REPORTING
IHC's operating segment, the Insurance Group, sells and
reinsures accident and health, life and annuity products, and is
actively exploring opportunities in the managed health care
market. The Insurance Group consists of IHC's three insurance
subsidiaries, Standard Life, Madison Life and First Standard and
their affiliates.
Interest expense, taxes, and general expenses associated
with parent company activities are included in Corporate.
Identifiable assets by segment are those assets that are utilized
in each segment. Corporate assets are composed principally of
cash equivalents, resale agreements, marketable securities, the
Company's remaining real estate operations and certain other
investments. Information by business segment for the years ended
December 31, 1995, 1994 and 1993 is as follows:
- 57 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
NOTE 18. SEGMENT REPORTING (CONTINUED)
1995 1994 1993
------------------------------------
(DOLLARS IN THOUSANDS)
REVENUES:
Insurance..................$ 69,792 $ 59,930 $ 64,241
Corporate.................. 1,635 1,574 1,203
------- ------- -------
$ 71,427 $ 61,504 $ 65,444
======= ======= =======
OPERATING INCOME FROM
CONTINUING OPERATIONS:
Insurance.................$ 7,797 $ 4,690 $ 8,772
Corporate................. 1,635 1,574 1,203
Less:
Corporate general
expenses................ 3,559 3,623 4,251
Corporate interest
expense................. 1,101 968 92
------- ------- -------
$ 4,772 $ 1,673 $ 5,632
======= ======= =======
IDENTIFIABLE ASSETS AT YEAR-END:
Insurance..................$266,832 $248,222 $257,245
Corporate.................. 12,082 11,897 15,256
Discontinued operations.... 7,293 6,249 4,488
------- ------- -------
$286,207 $266,368 $276,989
======= ======= =======
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
Dividends from Madison Life are subject to the prior
notification of the Commissioner of Insurance of the State of
Wisconsin ("Commissioner") if such dividend distribution exceeds
115% of the distribution for the corresponding period of the
previous year. In addition, if such dividends, together with the
fair value of other dividends paid or credited and distributions
made within the preceding twelve months, exceed the lesser of
total net gain from operations for the preceding calendar year
minus realized capital gains for that calendar year or 10% of
surplus with regard to policyholders as of December 31 of the
preceding year, such dividends may be paid so long as such
dividends have not been disapproved by the Commissioner within 30
days of its receipt of notice thereof. No dividends were paid by
Madison Life in 1994 or 1995. The payment of dividends by
Standard Life to its parent, Madison Life, requires prior
approval of the New York Superintendent of Insurance and is
limited by net income and capital and surplus. First Standard may
pay dividends to its parent, a subsidiary of Standard Life,
without the prior approval of the Delaware Insurance Commissioner
in an amount, the fair market value of which, together with that
of other dividends or distributions made within the preceding 12
- 58 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
(CONTINUED)
months does not exceed the greater of (i) 10% of surplus as
regards policyholders as of the preceding December 31 and (ii)
net income, not including realized capital gains, for the twelve
month period ending the 31st day of December next preceding.
First Standard declared and paid dividends of $1,780,000 and
$350,000 in 1995 and 1994, respectively.
Combined net income of the Insurance Group, as determined in
accordance with statutory accounting practices, was approximately
$6,926,000, $7,452,000, and $3,347,000 for 1995, 1994 and 1993,
respectively. Statutory capital and surplus for the Insurance
Group was approximately $48,193,000 and $43,327,000 at December
31, 1995 and 1994, respectively. Stockholder's equity of the
Insurance Group was approximately $49,172,000 and $34,471,000 as
of December 31, 1995 and 1994, respectively.
NOTE 20. QUARTERLY DATA (UNAUDITED)
The quarterly results of operations for the years ended
December 31, 1995 and 1994 are summarized below:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
- -----
Total revenues...............$ 16,218 $ 17,932 $ 17,803 $ 19,474
======= ======= ======= =======
Income from continuing
operations..................$ 149 $ 1,261 $ 1,583 $ 3,179
Income from discontinued
operations, net............. 588 528 442 470
------- ------- ------- -------
Net income...................$ 737 $ 1,789 $ 2,025 $ 3,649
======= ======= ======= =======
Per Common Share
Income from continuing
operations..................$ .01 $ .09 $ .10 $ .21
Income from discontinued
operations, net............. .04 .03 .03 .03
------- ------- ------- -------
Net income...................$ .05 $ .12 $ .13 $ .24
======= ======= ======= =======
- 59 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
NOTE 20. QUARTERLY DATA (UNAUDITED) (CONTINUED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994
- ----
Total revenues...............$ 17,780 $ 15,206 $ 14,535 $ 13,983
======= ======= ======= =======
Income from continuing
operations..................$ 1,317 $ 645 $ (112) $ 546
Income from discontinued
operations, net............. 455 562 660 162
------- ------- ------- -------
Net income...................$ 1,772 $ 1,207 $ 548 $ 708
======= ======= ======= =======
Per Common Share
Income from continuing
operations..................$ .08 $ .04 $ - $ .04
Income from discontinued
operations, net............. .03 .04 .04 .01
------- ------- ------- -------
Net income...................$ .11 $ .08 $ .04 $ .05
======= ======= ======= =======
- 60 -
<PAGE>
SCHEDULE I
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------ ---------- ---------- ----------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE (1) BALANCE SHEET (2)
- ------------------ ---------- ---------- ----------------
FIXED INCOME SECURITIES:
BONDS:
United States Government
and authorities..........$ 109,857,000 $ 111,283,000 $ 111,283,000
States, municipalities
and political sub-
divisions................ 1,620,000 1,624,000 1,624,000
Public utilities.......... 18,699,000 18,296,000 18,296,000
All other corporate
securities............... 10,106,000 10,190,000 10,190,000
------------ ------------ ------------
TOTAL FIXED
INCOME SECURITIES.......$ 140,282,000 $ 141,393,000 $ 141,393,000
============ ============ ============
EQUITY SECURITIES:
COMMON STOCKS:
Public utilities..........$ 419,000 $ 280,000 $ 280,000
Banks, trusts, and
insurance................ 376,000 308,000 308,000
Industrial, miscellaneous
and other............... 1,330,000 1,182,000 1,182,000
NON-REDEEMABLE PREFERRED
STOCK..................... 4,667,000 4,720,000 4,720,000
------------ ------------ ------------
TOTAL EQUITY SECURITIES..$ 6,792,000 $ 6,490,000 $ 6,490,000
============ ============ ============
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED:
EQUITY SECURITIES:
COMMON STOCKS:
Industrial,
miscellaneous and
other..................$ (752,000) $ (835,000) $ (835,000)
OPTIONS................... (2,000) (1,000) (1,000)
------------ ------------ ------------
TOTAL FINANCIAL
INSTRUMENTS SOLD, BUT
NOT YET PURCHASED......$ (754,000) $ (836,000) $ (836,000)
============ ============ ============
(CONTINUED)
- 61 -
<PAGE>
SCHEDULE I
(CONTINUED)
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------ ---------- ---------- ----------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE (1) BALANCE SHEET (2)
- ------------------ ---------- ---------- ----------------
Securities purchased under
agreements to resell.......$ 5,195,000 - $ 5,195,000
Partnership interests....... 18,889,000 - 18,889,000
Mortgage loans.............. 441,000 - 441,000
Policy loans................ 5,154,000 - 5,154,000
Real estate................. 929,000 - 929,000
Short-term investments (3).. 7,376,000 - 7,376,000
------------ ------------
TOTAL INVESTMENTS........$ 184,304,000 - $ 185,031,000
============ ============
NOTES:
(1) Reflects market value of fixed income securities and equity
securities at the balance sheet date.
(2) The total amounts of fixed income securities, equity
securities and short-term investments shown in Column D
differs from the total amounts shown in Column B as a result
of unrealized gains (losses) on equity and fixed income
securities.
(3) Short-term investments consist of U. S. Treasury Bills with
maturities of 91 days to 1 year.
- 62 -
<PAGE>
SCHEDULE III
INDEPENDENCE HOLDING COMPANY
BALANCE SHEETS
(PARENT COMPANY)
DECEMBER 31,
1995 1994
----------- -----------
ASSETS:
Cash and cash equivalents......................$ 249,000 $ 646,000
Investments in consolidated subsidiaries....... 64,143,000 61,875,000
Amounts due from consolidated subsidiaries..... 4,006,000 3,018,000
Notes and other receivables.................... 31,000 27,000
Other assets................................... 66,000 58,000
Net assets of discontinued operations.......... 7,293,000 6,249,000
----------- -----------
TOTAL ASSETS..............................$ 75,788,000 $ 71,873,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and other liabilities........$ 3,544,000 $ 4,084,000
Amounts due to consolidated subsidiaries...... 340,000 11,784,000
Dividends payable............................. 297,000 311,000
----------- -----------
TOTAL LIABILITIES.......................... 4,181,000 16,179,000
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, par value $1 per share
(50,000,000 shares authorized; 14,864,549
and 15,528,730 shares issued and outstanding,
respectively, net of 4,377,900 shares in
treasury)..................................... 14,865,000 15,529,000
Paid-in capital................................ 68,812,000 69,800,000
Unrealized gains (losses) on investments, net
of deferred taxes (tax benefits) of $321,000
and ($906,000), respectively.................. 495,000 (9,168,000)
Accumulated deficit............................ (12,565,000) (20,467,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................. 71,607,000 55,694,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 75,788,000 $ 71,873,000
=========== ===========
The financial information of Independence Holding Company (Parent
Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
- 63 -
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF OPERATIONS
(PARENT COMPANY)
YEAR ENDED DECEMBER 31,
1995 1994 1993
------------------------------------------
REVENUES:
Net investment income
(loss)....................$ 18,000 $ (130,000) $ (487,000)
Other income............... 529,000 573,000 470,000
---------- ---------- ----------
547,000 443,000 (17,000)
---------- ---------- ----------
EXPENSES:
General and adminis-
trative expenses.......... 2,778,000 3,201,000 3,907,000
---------- ---------- ----------
Loss before income tax
benefit.................... (2,231,000) (2,758,000) (3,924,000)
Income tax benefit (1)...... (1,995,000) (2,211,000) (1,404,000)
---------- ---------- ----------
Loss before equity in net
income of subsidiaries and
discontinued operations.... (236,000) (547,000) (2,520,000)
Equity in undistributed
net income of
subsidiaries............... 6,408,000 2,943,000 6,561,000
Cumulative effect of
accounting changes......... - - (340,000)
Income from discontinued
operations, net............ 2,028,000 1,839,000 1,378,000
---------- ---------- ----------
Net income..................$ 8,200,000 $ 4,235,000 $ 5,079,000
========== ========== ==========
The financial information of Independence Holding Company (Parent
Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
NOTE:
(1) Includes a charge in lieu of Federal income taxes of
$599,000 in 1995, $363,000 in 1994, and $65,000 in 1993 with
a corresponding credit to paid-in capital.
- 64 -
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY)
YEAR ENDED DECEMBER 31,
1995 1994 1993
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................ $ 8,200,000 $ 4,235,000 $ 5,079,000
Adjustments to reconcile net income
to net cash used by operating
activities:
Equity in net income of
subsidiaries................... (6,408,000) (2,943,000) (6,561,000)
Income from discontinued
operations, net................ (2,028,000) (1,839,000) (1,378,000)
Cumulative effect of change in
accounting principle......... .. - - 340,000
Income tax benefit credited to
paid-in capital................ 599,000 363,000 65,000
Realized losses on sales of
investment securities.......... - 198,000 557,000
Change in other assets and
liabilities.................... (3,759,000) (1,801,000) (605,000)
---------- ---------- ----------
Net cash used by operating
activities.................. (3,396,000) (1,787,000) (2,503,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING SECURITIES:
Discontinued operations, net...... (301,000) (741,000) 80,000
Decrease in investment in and
advances to consolidated
subsidiaries..................... 5,862,000 3,940,000 5,933,000
---------- ---------- ----------
Net cash provided by investing
activities....................... 5,561,000 3,199,000 6,013,000
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......... - - 25,000
Repurchase of common stock
and warrants..................... (2,251,000) (1,009,000) (3,359,000)
Dividends paid.................... (311,000) (316,000) (321,000)
Net cash used by financing ------------ ---------- ----------
activities..................... (2,562,000) (1,325,000) (3,655,000)
------------ ---------- ----------
Increase (Decrease) in cash and
cash equivalents................. (397,000) 87,000 (145,000)
Cash and cash equivalents,
beginning of year................ 646,000 559,000 704,000
Cash and cash equivalents, end of ------------ ---------- ----------
year............................. $ 249,000 $ 646,000 $ 559,000
============ ========== ==========
The financial information of Independence Holding Company (Parent
Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
- 65 -
<PAGE>
<TABLE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUTURE
POLICY NET AMORTIZ-
BENEFITS, INVESTMENT ATION OF
CLAIMS INCOME AND DEFERRED
DEFERRED & OTHER GAINS, INSURANCE OTHER
INSURANCE POLICY- AND OTHER BENEFITS ACQUIS- OPERATING
ACQUISITION HOLDERS' UNEARNED PREMIUM INCOME AND ITION EXPENSES PREMIUMS
COSTS FUNDS PREMIUMS REVENUE (1) CLAIMS COSTS (2) WRITTEN
------- ------- ------- ------- ------- ------- ------- ------- -------
DECEMBER 31, 1995:
Life and
annuity.....$ 5,116 $ 91,310 $ 4,274 $ 12,321 $ 7,251 $ 9,998 $ 2,286 $ 4,690 $ 11,894
Health....... 4,040 54,258 8,391 44,080 6,140 27,347 1,612 16,062 43,756
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9,156 $145,568 $ 12,665 $ 56,401 $ 13,391 $ 37,345 $ 3,898 $ 20,752 $ 55,650
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1994:
Life and
annuity.....$ 6,219 $ 89,179 $ 5,222 $ 11,418 $ 4,485 $ 8,842 $ 3,097 $ 3,618 $ 10,828
Health....... 4,760 47,129 9,458 39,205 4,822 23,975 2,476 13,232 37,481
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 10,979 $136,308 $ 14,680 $ 50,623 $ 9,307 $ 32,817 $ 5,573 $ 16,850 $ 48,309
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1993:
Life and
annuity.....$ 7,993 $ 91,593 $ 6,459 $ 12,467 $ 9,688 $ 12,071 $ 3,604 $ 3,280 $ 14,505
Health....... 5,941 50,552 10,486 35,071 7,016 21,929 2,840 11,746 36,300
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 13,934 $142,145 $ 16,945 $ 47,538 $ 16,704 $ 34,000 $ 6,444 $ 15,026 $ 50,805
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net investment income is allocated between product lines based on the mean reserve method.
(2) Direct operating expenses are specifically identified and charged to product lines. Indirect
expenses are allocated based on time studies, however, other acceptable methods of allocation
might produce different results.
- 66 -
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
3 (i)(1) Restated Certificate of Incorporation of
Independence Holding Company.*
3 (i)(2) Certificate of Amendment of Restated Certificate
of Incorporation of Independence Holding Company.**
3 (ii) By-laws of Independence Holding Company.*
4 (i) Form of Warrant Certificate to purchase shares of
Common Stock of Independence Holding Company,
expiring June 30, 2001.*
10(iii)(A) Executive Compensation Plans and Agreements
(1) Independence Holding Company 1988 Stock
Incentive Plan***
(2) Form of Independence Holding Company
Stock Option Agreement****
(3) Deferred Compensation Agreement*****
(4) Retirement Benefit Agreements*****
11 Statement re: computation of per share earnings for
the years ended December 31, 1995, 1994 and 1993.
21 Principal subsidiaries of Independence Holding Company,
as of March 15, 1996.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
*Such exhibits are incorporated by reference to the Report on Form
10-K for the fiscal year ended December 31, 1987, as amended, of
Independence Holding Company.
**Such exhibit is incorporated by reference to the Report on Form
10-K for the fiscal year ended December 31, 1990, as amended, of
Independence Holding Company.
***Such exhibit is incorporated by reference to the Proxy
Statement for the Annual Meeting of Stockholders held on May 25,
1988 of Independence Holding Company.
**** Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1988 of
Independence Holding Company.
***** Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1993 of
Independence Holding Company.
Exhibits will be furnished upon request for a reasonable fee.
- 67 -
<PAGE>
</TABLE>
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
1995 1994 1993
--------------------------------------
PRIMARY EARNINGS PER SHARE
INCOME:
Income from continuing
operations........................$ 6,172 $ 2,396 $ 4,041
Cumulative effect of
accounting changes................ - - (340)
Income from discontinued
operations, net................... 2,028 1,839 1,378
-------- -------- --------
Net income.........................$ 8,200 $ 4,235 $ 5,079
======== ======== ========
SHARES:
Weighted average common
shares outstanding................ 15,194 15,717 16,148
Shares assumed issued for options.. 22 - -
-------- -------- --------
Average common and common
equivalents shares outstanding..... 15,216 15,717 16,148
======== ======== ========
INCOME PER SHARE:
Primary income per share from
continuing operations.............$ 0.41 $ 0.15 $ 0.25
Primary income per share from
accounting changes................ - - (0.02)
Primary income per share from
discontinued operations........... .13 .12 .08
-------- -------- --------
Primary net income per share.......$ 0.54 $ 0.27 $ 0.31
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of warrants.......$ 32,182 $ 32,676 $ 42,294
Assumed exercise of options........ 2,204 133 125
Repurchase of treasury stock at
average market price of $3.32,
$3.07 and $2.81, respectively..... (10,119) (9,650) (9,075)
Assumed payment of debt
outstanding....................... (13,311) (14,730) (3,161)
-------- --------- ---------
Assumed balance to be invested.....$ 10,956 $ 8,429 $ 30,183
======== ========= =========
INCOME:
Net income from continuing
operations........................$ 6,172 $ 2,396 $ 4,041
Pro-forma interest income......... 876 674 2,716
Pro-forma reduction of
interest expense................. 1,065 1,031 316
-------- --------- ---------
Adusted net income from
continuing operations............. 8,113 4,101 7,073
Cumulative effect of
accounting changes................ - - (340)
Income from discontinued
operations, net................... 2,028 1,839 1,378
-------- --------- ---------
Adjusted net income................$ 10,141 $ 5,940 $ 8,111
======== ========= =========
SHARES:
Weighted average shares
outstanding........................ 15,194 15,717 16,148
Shares assumed issued for warrants. 3,633 3,688 4,774
Shares assumed issued for options.. 633 37 32
Treasury stock assumed purchased... (3,039) (3,143) (3,230)
-------- --------- ---------
Adjusted average shares
outstanding....................... 16,421 16,299 17,724
======== ========= =========
INCOME PER SHARE:
Fully diluted income per share
from continuing operations........$ 0.50 $ 0.25 $ 0.40
Fully diluted income per share
from accounting changes........... - - (0.02)
Fully diluted income per share
from discontinued operations...... .12 .11 .08
-------- -------- --------
Fully diluted net income per share $ 0.62 $ 0.36 $ 0.46
======== ======== ========
(A) The fully diluted earnings per share calculation, utilizing
the treasury stock method as prescribed by paragraphs 38(a)
and 38(b) of APB No. 15, is anti-dilutive.
EXHIBIT 21
INDEPENDENCE HOLDING COMPANY
Subsidiaries as of December 31, 1995
------------------------------------
Subsidiary Jurisdiction
- ---------- ------------
The Madison Company Delaware
Independence Capital Group, Inc. Delaware
Independence Financial Services
Corp. Delaware
Madison National Life Insurance
Company, Inc. Wisconsin
Madison Investors Corporation Delaware
Standard Security Life Insurance
Company of New York New York
Standard Security Investors
Corp. New York
Standard Life Asset Management
Corp. New York
SSH Corp. Delaware
First Standard Security
Insurance Company Delaware
On-Line Brokerage, Inc. Delaware
International Benefits
Administrators L.L.C. New York
Madison Standard Corp. Wisconsin
Zimmerman Holdings, Inc. Delaware
Zimmerman Sign Company Texas
Independence Land and Capital, Inc. Delaware
The Logan Group, Inc. Florida
R. H. Financial Corp. Delaware
Incopoint Limited Partnership Connecticut
IFS Corp. Delaware
G.P. Associates Holding Corp. Delaware
Standard Life Capital Corp. New York
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
INDEPENDENCE HOLDING COMPANY:
We consent to incorporation by reference in the registration
statement (No. 33-23302) on Form S-8 of Independence Holding
Company and subsidiaries of our report dated March 25, 1996,
relating to the consolidated balance sheets of Independence Holding
Company and subsidiaries as of December 31, 1995 and 1994 and the
related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1995, which report appears in
the 1995 annual report on Form 10-K of Independence Holding Company
and subsidiaries. Our report refers to the adoption of the
provisions of accounting for certain investments in debt and equity
securities in 1993.
KPMG PEAT MARWICK LLP
New York, New York
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-K for the year ended December 31, 1995
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000701869
<NAME> INDEPENDENCE HOLDING COMAPNY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 141,393,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 6,490,000
<MORTGAGE> 441,000
<REAL-ESTATE> 929,000
<TOTAL-INVEST> 185,031,000
<CASH> 26,860,000
<RECOVER-REINSURE> 44,588,000
<DEFERRED-ACQUISITION> 9,156,000
<TOTAL-ASSETS> 286,207,000
<POLICY-LOSSES> 109,034,000
<UNEARNED-PREMIUMS> 12,665,000
<POLICY-OTHER> 34,463,000
<POLICY-HOLDER-FUNDS> 2,071,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 14,865,000
<OTHER-SE> 56,742,000
<TOTAL-LIABILITY-AND-EQUITY> 286,207,000
56,401,000
<INVESTMENT-INCOME> 13,885,000
<INVESTMENT-GAINS> (44,000)
<OTHER-INCOME> 1,668,000
<BENEFITS> 37,345,000
<UNDERWRITING-AMORTIZATION> 3,898,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 4,772,000
<INCOME-TAX> (1,400,000)
<INCOME-CONTINUING> 6,172,000
<DISCONTINUED> 2,028,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,200,000
<EPS-PRIMARY> .54
<EPS-DILUTED> .62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
