FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 1997
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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)
Registrant's telephone number, including area code: (203)358-8000
NOT APPLICABLE
- -------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports),and (2)has been
subject to such filing requirements for the past 90 days. Yes X. No .
7,431,769 SHARES OF COMMON STOCK, $1.00 PAR VALUE
- ----------------------------------------------------------------------
Common stock outstanding as of November 6, 1997
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Consolidated Balance Sheets -
September 30, 1997 (unaudited)
and December 31, 1996........................... 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1997 and 1996 (unaudited)......... 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997
and 1996 (unaudited)............................ 4
Notes to Consolidated Financial Statements
(unaudited)...................................... 5 - 10
Management's Discussion and Analysis of Results
of Operations and Financial Condition........... 11 - 17
PART II - OTHER INFORMATION
- ---------------------------
Item 6 - Exhibits and Reports on Form 8-K........ 18
Signatures....................................... 19
1
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
(UNAUDITED) 1997 1996
- -----------------------------------------------------------------
ASSETS:
Cash and cash equivalents..........$ 1,325,000 $ 10,361,000
Short-term investments............ 7,414,000 $ 10,316,000
Securities purchased under
agreements to resell............. 18,140,000 36,542,000
Fixed maturities (Note 3)......... 183,504,000 165,040,000
Equity securities (Note 3)........ 14,391,000 4,427,000
Other investments................. 44,755,000 32,683,000
----------- -----------
Total investments............. 268,204,000 249,008,000
Deferred insurance acquisition
costs............................. 10,959,000 11,221,000
Due and unpaid premiums............ 7,734,000 5,122,000
Due from reinsurers................ 86,944,000 50,877,000
Due from brokers................... 371,000 -
Notes and other receivables........ 4,152,000 4,205,000
Other assets....................... 7,260,000 5,607,000
----------- -----------
TOTAL ASSETS.................$386,949,000 $336,401,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits.............$146,516,000 $115,594,000
Unearned premiums.................. 23,735,000 11,654,000
Funds on deposit................... 65,535,000 68,915,000
Insurance policy claims............ 4,717,000 3,914,000
Other policyholders' funds......... 2,268,000 2,201,000
Financial instruments sold, but
not yet purchased (Note 3)........ 109,000 539,000
Due to brokers..................... 14,486,000 19,740,000
Due to reinsurers.................. 9,057,000 6,764,000
Accounts payable, accruals and
other liabilities................. 19,003,000 18,653,000
Liability for business transferred. 7,905,000 7,905,000
Income taxes....................... 5,440,000 3,666,000
----------- -----------
TOTAL LIABILITIES.............. 298,771,000 259,545,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (none issued)...... - -
Common stock, 7,431,769 shares
issued and outstanding, net of
2,188,950 shares in treasury...... 7,432,000 7,432,000
Paid-in capital.................... 76,068,000 76,068,000
Unrealized gains (losses) on
investments, net of taxes(Note 6). 1,580,000 (1,466,000)
Retained earnings (accumulated
deficit).......................... 3,098,000 (5,178,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY..... 88,178,000 76,856,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..........$386,949,000 $336,401,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
2
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------
REVENUES:
Insurance premiums....$ 21,735,000 $ 17,084,000 $ 60,557,000 $ 50,632,000
Net investment income. 6,046,000 3,394,000 15,763,000 12,099,000
Net realized and
unrealized gains
(losses)............. 52,000 208,000 (99,000) (453,000)
Equity income (loss).. 72,000 (36,000) 151,000 40,000
Other income.......... 1,301,000 1,050,000 2,165,000 3,114,000
---------- ---------- ---------- ----------
29,206,000 21,700,000 78,537,000 65,432,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves.. 16,269,000 12,024,000 43,231,000 36,650,000
Amortization of
deferred insurance
acquisition costs.... 741,000 713,000 2,195,000 2,935,000
Interest expense...... - 192,000 - 657,000
Selling, general and
administrative
expenses............. 8,691,000 7,052,000 23,699,000 20,971,000
---------- ---------- ---------- ----------
25,701,000 19,981,000 69,125,000 61,213,000
---------- ---------- ---------- ----------
Operating income
before income taxes.. 3,505,000 1,719,000 9,412,000 4,219,000
Income tax expense
(benefit)............ 680,000 (237,000) 1,136,000 (569,000)
---------- ---------- ---------- ----------
Income from continuing
operations........... 2,825,000 1,956,000 8,276,000 4,788,000
Income from discon-
tinued operations,net - 531,000 - 1,558,000
---------- ---------- ---------- ----------
Net income............$ 2,825,000 $ 2,487,000 $ 8,276,000 $ 6,346,000
========== ========== ========== ==========
INCOME PER COMMON SHARE:
Income from continuing
operations............$ .37 $ .26 $ 1.10 $ .64
Income from discon-
tinued operations,net. - .07 - .21
---------- ---------- ---------- ----------
Net income.............$ .37 $ .33 $ 1.10 $ .85
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING.... 7,602,000 7,500,000 7,549,000 7,489,000
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
3
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
- ---------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...............................$ 8,276,000 $ 6,346,000
Adjustment to reconcile net income to net
cash provided by operating activities:
Amortization of deferred insurance
acquisition costs....................... 2,195,000 2,935,000
Realized losses on investments........... 70,000 461,000
Unrealized losses on trading securities.. 30,000 (8,000)
Equity income............................ (151,000) (40,000)
Depreciation............................. 308,000 225,000
Deferred taxes........................... 437,000 (126,000)
Income from discontinued operations, net. - (1,558,000)
Other.................................... (5,312,000) (2,192,000)
Change in assets and liabilities:
Net purchases of trading securities...... (2,031,000) (261,000)
Increase in insurance liabilities........ 42,311,000 34,347,000
Additions to deferred insurance
acquisition costs....................... (1,932,000) (4,831,000)
Change in net amounts due from and to
reinsurers..............................(33,774,000) 2,372,000
Change in income tax liability........... 32,000 (315,000)
Other.................................... (3,467,000) (237,000)
----------- -----------
Net cash provided by operating
activities......................... 6,992,000 37,118,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers................................. (5,625,000) (11,225,000)
Sales and maturities of short-term
investments............................. 35,166,000 22,245,000
Purchases of short-term investments...... (32,254,000) (24,195,000)
Net purchases (sales) of resale
agreements.............................. 18,402,000 (7,527,000)
Sales and maturities of fixed maturities. 121,589,000 120,069,000
Purchases of fixed maturities............(137,010,000) (150,490,000)
Sales of equity securities............... 20,190,000 17,112,000
Purchases of equity securities........... (27,159,000) (15,632,000)
Proceeds on sale of other investments.... 3,081,000 3,200,000
Other investments, net................... (9,541,000) (10,167,000)
Other.................................... (677,000) 4,548,000
----------- -----------
Net cash used by investing
activities......................... (13,838,000) (52,062,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and warrants.. - (5,000)
Payments of investment-type insurance
contracts............................... (1,818,000) (1,818,000)
Payments of long-term debt............... - (2,055,000)
Dividends paid........................... (372,000) (297,000)
----------- -----------
Net cash used by financing
activities........................ (2,190,000) (4,175,000)
----------- -----------
Decrease in cash and cash equivalents.... (9,036,000) (19,119,000)
Cash and cash equivalents, beginning
of year................................. 10,361,000 26,860,000
----------- -----------
Cash and cash equivalents, end of period.$ 1,325,000 $ 7,741,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
4
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company
engaged principally in the life and health insurance business
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
subsidiaries (collectively, the "Insurance Group"). IHC and its
subsidiaries (including the Insurance Group) are collectively
referred to as the "Company".
Geneve Corporation, a diversified financial holding company,
and its affiliated entities (collectively "Geneve") hold
approximately 55% of IHC's outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in
accordance with the requirements for quarterly reports on Form 10-
Q. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) that are necessary for a fair
presentation of the consolidated results of operations for the
interim periods have been included. The consolidated results of
operations for the three months and nine months ended September
30, 1997 are not necessarily indicative of the results to be
anticipated for the entire year. The consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in IHC's Annual
Report on Form 10-K for the year ended December 31, 1996.
Certain amounts in prior year's consolidated financial statements
and notes thereto have been restated to conform to the 1997
presentation.
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.
5
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______________________________________________________________
NOTE 2. DISCONTINUED OPERATIONS
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman Sign Company, "Zimmerman", on a pro
rata basis to holders of record of IHC's common stock as of
December 20, 1996. In connection with the distribution of
Zimmerman, a subsidiary of the Company has guaranteed $10,000,000
of subordinated debt of Zimmerman. Accordingly, the credit to
stockholders' equity of $7,905,000, or $1.06, per share that
would have been recorded upon consummation of the distribution of
Zimmerman has been deferred until such time as the subordinated
debt is repaid or the guarantee is eliminated.
Since Zimmerman historically comprised all of IHC's
manufacturing segment, the Consolidated Financial Statements and
notes thereto of IHC present Zimmerman as discontinued operations
during 1996.
NOTE 3. INVESTMENT SECURITIES
The cost (amortized cost with respect to certain fixed
maturities) and fair value of IHC's investment securities as of
September 30, 1997 and December 31, 1996 are as follows:
SEPTEMBER 30, 1997
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities...$ 32,603 $ 381 $ (299) $ 32,685
U.S. Government and
agencies obligations.. 33,021 461 (116) 33,366
Government National
Mortgage Association.. 113,955 1,203 (21) 115,137
Obligations of states
and political
subdivisions.......... 2,353 58 (95) 2,316
------- ------- ------- -------
Total fixed maturities $181,932 $ 2,103 $ (531) $183,504
======= ======= ======= =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common stock...........$ 9,211 $ 686 $ (57) $ 9,840
Options................ 92 - (13) 79
Preferred stock........ 2,059 205 - 2,264
------- ------- ------- -------
11,362 891 (70) 12,183
------- ------- ------- -------
TRADING:
Common stock........... 2,146 86 (24) 2,208
------- ------- ------- -------
Total equity securities..$ 13,508 $ 977 $ (94) $ 14,391
======= ======= ======= =======
6
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______________________________________________________________
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
SEPTEMBER 30, 1997
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------------------------------
(DOLLARS IN THOUSANDS)
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- ---------------------------
TRADING:
Options................$ (148) $ 43 $ (4) $ (109)
======= ======= ======== =======
DECEMBER 31, 1996
---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
---------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities...$ 30,204 $ 377 $ (1,311) $ 29,270
U.S. Government and
agencies obligations.. 28,832 180 (747) 28,265
Government National
Mortgage Association... 106,701 69 (844) 105,926
Obligations of states
and political
subdivisions.......... 1,618 44 (83) 1,579
------- ------ -------- -------
Total fixed maturities $167,355 $ 670 $ (2,985) $165,040
======= ====== ======== =======
EQUITY SECURITIES
- -----------------
AVAILABLE-FOR-SALE:
Common stock...........$ 2,211 $ 283 $ (31) $ 2,463
Preferred stock........ 1,440 105 - 1,545
------- ------- ------- -------
3,651 388 (31) $ 4,008
------- ------- ------- -------
TRADING:
Common stock........... 335 84 - 419
------- ------- ------- -------
Total equity securities $ 3,986 $ 472 $ (31) $ 4,427
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- ---------------------------
TRADING:
Common stock...........$ (585) $ 46 $ - $ (539)
======= ======= ======= =======
7
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_____________________________________________________________
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of fixed maturities at
September 30, 1997, 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.
SEPTEMBER 30, 1997
-------------------
AMORTIZED FAIR
COST VALUE
--------- -----
(DOLLARS IN THOUSANDS)
Due in one year or less.........$ - $ -
Due after one year through
five years..................... 4,763 4,878
Due after five years through
ten years...................... 35,583 35,908
Due after ten years............. 27,631 27,581
------- -------
67,977 68,367
GNMA - 15 year.................. 45,017 45,397
GNMA - 30 year.................. 68,938 69,740
------- -------
Totals..........................$181,932 $183,504
======= =======
NOTE 4. OTHER INVESTMENTS
At September 30, 1997, the Company had an investment of
$18,449,000 in a limited partnership which invests in relatively
"market neutral" strategies, such as risk arbitrage, convertible
arbitrage and distressed situations. The condensed statement of
operations for the limited partnership is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------ -----------------
(DOLLARS IN THOUSANDS)
Revenues..........$ 2,949 $ 1,119 $ 9,191 $ 4,889
Net income........$ 2,213 $ 793 6,774 $ 3,896
IHC's share of
net income.......$ 1,076 $ 230 $ 3,107 $ 1,440
NOTE 5. INCOME PER SHARE
The computations of income per share were based upon the
weighted average number of common and dilutive common equivalent
shares outstanding of 7,602,000 and 7,500,000 for the three
8
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
______________________________________________________________
NOTE 5. INCOME PER SHARE (CONTINUED)
months ended September 30, 1997 and 1996, respectively, and
7,549,000 and 7,489,000 for the nine months ended September 30,
1997 and 1996. Dilutive common equivalent shares include 170,000
and 68,000 for the three months ended September 30, 1997 and
1996, respectively, and 117,000 and 57,000 for the nine months
ended September 30, 1997 and 1996 respectively, from the assumed
exercise of options using the treasury stock method. Fully
diluted earnings per share is not shown as the assumed exercise
of all other stock options and warrants is anti-dilutive.
NOTE 6. INCOME TAXES
The provision for income taxes shown in the consolidated
statements of operations was computed based on the Company's
estimate of the effective tax rates expected to be applicable for
the current year, including the expected tax impact of the
life/nonlife consolidation and discontinued operations.
The income tax expense for the nine months ended September
30, 1997 allocated to stockholders' equity for unrealized gains
on investment securities was $1,306,000 representing the change
in deferred tax expense of $814,000 at September 30, 1997 from a
deferred tax benefit of $492,000 at December 31, 1996.
NOTE 7. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------------------
(DOLLARS IN THOUSANDS)
Cash payments for:
Interest...............$ - $ 643
Income taxes...........$ 676 $ 877
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, FASB issued SFAS 128, "Earnings per Share"
which changes the calculation of both primary and fully diluted
earnings per share. The requirements of SFAS No. 128 are
effective for financial statements for periods ending after
December 15, 1997, and require the restatement of all prior
periods earnings per share calculations. Earlier application is
not permitted. Under SFAS No. 128, the calculation of IHC'S
earnings per share and earnings per share-assuming dilution for
each of the three and nine months ended September 30, 1997 and
1996 will not be materially different than primary earnings per
share.
9
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________________________________________
NOTE 8. NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and FASB No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The
requirements for both SFAS No. 130 and No. 131 are effective for
financial statements for periods ending after December 15, 1997.
The Company is currently evaluating the impact of SFAS No. 130
and No. 131 on the financial statements.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business 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 subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance
Group) are collectively referred to as the "Company". All
remaining assets, principally parent company liquidity (cash,
cash equivalents, resale agreements, partnership investments and
marketable securities), the Company's small real estate portfolio
and certain other investments of the Company, are included in
Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1996
- -----------------------------------------------------------------
The Company's operating income from continuing operations
increased $1.8 million, or 104%, to $3.5 million for the period
ended September 30, 1997 from $1.7 million for the same period in
1996. The Company had net realized and unrealized gains of $.1
million in 1997 and $.2 million in 1996. Excluding net realized
and unrealized gains, the Company had operating income from
continuing operations of $3.4 million in 1997 as compared to $1.5
million in 1996. Income from continuing operations, net was $2.8
million, or $.37 per share, for the quarter ended September 30,
1997 compared to $2.0 million, or $.26 per share, for the quarter
ended September 30, 1996. Income tax expense increased to $.7
million in 1997 from a tax benefit of $.2 million in 1996 (see
Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $1.1
million, or 44%, to $3.6 million in 1997 from $2.5 million in
1996. Operating income includes net realized and unrealized gains
of $.1 million in 1997 compared to $.2 million in 1996.
Decisions to sell securities are based on cash flow needs,
investment opportunities and economic and market conditions, thus
creating fluctuations in gains (losses) from year to year.
Operating income excluding net realized and unrealized gains was
$3.5 million in 1997 compared to $2.3 million in 1996.
Premium revenues increased $4.6 million, or 27%, to $21.7
million in 1997 from $17.1 million in 1996; premium revenues at
Madison Life increased $3.3 million while Standard Life had a
$1.3 million increase in premiums. The increase at Madison Life
11
<PAGE>
is comprised of: a $2.9 million increase in the credit lines of
business primarily due to the acquisition of a block of business
in the third quarter of 1997, effective April 1, 1997; a $.2
million increase in long-term disability premiums; and a $.3
million increase in other life and health lines of business,
offset by a $.1 million decrease in the ordinary life and
individual accident and health lines of business. The change at
Standard Life is comprised of: a $1.3 million increase in its DBL
line due to acquisitions and continued growth in this line of
business; and a $.3 million increase in the closed blocks of
life, annuity and individual and group accident and health lines
of business, offset by a $.3 million decrease in stop-loss
premiums, due to decreased retention of several managing general
underwriters.
Total net investment income increased $2.2 million primarily
due to an increase in assets at Madison Life related to the
acquisition of blocks of business, an increased return on assets
and the retention of assets at Standard Life which were subject
to a right of recapture in the third quarter of 1996, but which
assets were subsequently not recaptured. The annualized return on
investments of the Insurance Group in the third quarter of 1997
was 7.9% compared to 7.0% in the third quarter of 1996.
Other income increased $.2 million and equity income from
partnerships increased $.1 million from 1996 to 1997.
Insurance benefits, claims and reserves increased $4.1
million, or 34%, reflecting an increase of $2.3 million at
Madison Life and $1.8 million at Standard Life. Madison Life's
increase resulted from: a $1.6 million increase in the credit
line of business due to the acquisition of a block of business
and due to new accounts; a $.2 million increase in interest
credited to universal life and annuity products; and a $.5
million increase in claims and reserves in other life and health
lines of business. The change at Standard Life is comprised of:
a $.8 million increase in stop-loss reserves, a $.1 million
increase in HMO reinsurance reserves; a $.8 million increase in
additional DBL claims and reserves due to increased volume; and a
$.1 million increase in point of service claims.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $1.8
million. Madison Life's expenses increased $1.6 million and
Standard Life's expenses increased $.2 million primarily due to
increases in commissions of $1.2 million, premium taxes of $.1
million and other general expenses of $.5 million related to the
increase in premium volume at both insurance companies and the
acquisition of new blocks of business at Madison Life.
Corporate
- ---------
Operating income for the quarter ended September 30, 1997
increased by $.7 million from 1996. Investment income increased
12
<PAGE>
$.4 million from 1996 due to higher returns from certain hedged
equity investments and an increase in corporate liquidity in
1997. Interest expense decreased $.2 million due to the payment
of all long term debt during 1996. Selling, general and
administrative expenses decreased $.1 million.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1996
- -----------------------------------------------------------------
The Company's operating income from continuing operations
increased $5.2 million, or 123%, to $9.4 million for the period
ended September 30, 1997 from $4.2 million for the same period in
1996. The Company had net realized and unrealized losses of $.1
million in 1997 and $.5 million in 1996. Included in the nine
month period ended September 30, 1997 is a non-recurring gain of
$1.0 million resulting from the sale of real estate carried by
the Company at nominal value. Excluding net realized and
unrealized losses and the non-recurring gain, the Company had
operating income from continuing operations of $8.5 million in
1997 as compared to $4.7 million in 1996. Income from continuing
operations, net was $8.3 million, or $1.10 per share, for the
nine months ended September 30, 1997 compared to $4.8 million, or
$.64 per share, for the nine months ended September 30, 1996.
Income tax expense increased to $1.1 million in 1997 from a tax
benefit of $.6 million in 1996 (see Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased 33% to $8.8
million in 1997 from $6.6 million in 1996. Operating income
includes net realized and unrealized losses of $.1 million in
1997 compared to $.5 million in 1996. Operating income excluding
net realized and unrealized losses was $8.9 million in 1997
compared to $7.1 million in 1996.
Premium revenues increased $9.9 million, or 20%, to $60.5
million in 1997 from $50.6 million in 1996; premium revenues at
Madison Life increased $4.5 million while Standard Life showed a
$5.4 million increase in premiums. The increase at Madison Life
is comprised of: a $3.6 million increase in the credit lines of
business primarily due to the acquisition of a block of business
in the third quarter of 1997, effective April 1, 1997; a $.4
million increase in long-term disability premiums; and a $.6
million increase in the dental line of business, offset by a net
$.1 million decrease in other life and health lines of business.
The increase at Standard Life is comprised of: a $4.4 million
increase in its DBL line due to acquisitions and the continued
growth in this line of business; a $.2 million increase in the
point of service business; a $.4 million increase in the closed
blocks of life, annuity and individual and group accident and
health lines of business; and a $.4 million increase in other
life and health lines of business.
13
<PAGE>
Total net investment income increased $3.0 million primarily
due to an increase in assets at Madison Life related to the
acquisition of blocks of business, an increased return on assets
and the retention of assets at Standard Life which were subject
to a right of recapture in the third quarter of 1996, but which
assets were subsequently not recaptured. The annualized return
on investments of the Insurance Group for the nine months period
ended September 30, 1997 was 7.6% compared to 7.5% for the same
period of 1996. Equity income from partnership investments
increased $.1 million.
Other income decreased $2.0 million from 1996 to 1997
resulting from the surrender by a large group of policyholders in
a coinsurance treaty at Standard Life, offset by the credit to
reserves relating to the closed blocks of life, annuity and
individual and group accident and health lines of business
discussed below.
Insurance benefits, claims and reserves increased $6.5
million, or 18%, reflecting an increase of $3.4 million at
Madison Life and $3.1 million at Standard Life. Madison Life's
increase resulted from: a $.3 million increase in long-term
disability claims; a $.6 million increase in claims and reserves
in other life and health lines of business; a $.6 million
increase in dental claims due to the increase in premium volume;
a $.9 million increase in interest credited to universal life and
annuity products; and a $2.0 million increase in the credit line
of business due to the acquisition of the block of business in
the third quarter of 1997 and the addition of new accounts
throughout the current year, offset by a $1.0 million decrease in
ordinary life and individual accident and health claims and
reserves. The change at Standard Life is comprised of: a $2.1
million increase in stop-loss reserves; a $2.9 million increase
in DBL claims and reserves due to increased volume; and a $.3
million net increase in claims and reserves in the HMO
reinsurance line of business, offset by a $2.2 million decrease
in claims and reserves of the closed blocks of life, annuity and
individual and group accident and health lines of business due to
the surrender by the large group of policyholders.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $2.7
million. Madison Life's expenses increased $2.2 million and
Standard Life's expenses increased $.5 million primarily due to
increases in commissions of $1.6 million, premium taxes of $.2
million and other general expenses of $.9 million related to the
increase in premium volume at both insurance companies and the
acquisition of new blocks of business at Madison Life.
14
<PAGE>
Corporate
- ---------
Operating income for the nine months ended September 30,
1997 increased by $3.0 million from 1996. Investment income
increased $.6 million from 1996 due to higher corporate liquidity
in 1997. Other income increased by $1.0 million due to the sale
of the Company's remaining real estate in Florida. Interest
expense decreased $.6 million due to the repayment of all long
term debt during 1996. Selling, general and administrative
expenses decreased $.8 million due to a reduction in expenses
related to the Florida real estate, salaries and legal fees.
LIQUIDITY
---------
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 Company's investment
assets, approximately 81% was invested in investment grade fixed
income securities, resale agreements, policy loans and cash and
cash equivalents at September 30, 1997. Also at such date,
approximately 97.7% of the Company's fixed maturities were
investment grade. These investments carry less risk and,
therefore, lower interest rates than other types of fixed
maturity investments. At September 30, 1997, approximately 2.3%
of the carrying value of fixed maturities 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). Less than .1% of the
Company's total investments were in mortgage loans. Any
remaining real estate is carried on the balance sheet at nominal
value. The Company has no non-performing fixed maturities.
The Company monitors its investment portfolio on a
continuous basis and believes that the liquidity of the Insurance
Group will not be adversely affected by its current investments.
The Company has net receivables from reinsurers of $77.9
million at September 30, 1997. Substantially all of the business
ceded to such reinsurers is of short duration. All of such
receivables are current and are either due from highly rated
companies authorized to do business in the state of domicile of
the individual insurance companies, or are secured by either a
15
<PAGE>
letter of credit or custodial trust agreement. Accordingly, no
allowance for doubtful accounts was necessary at September 30,
1997.
Corporate
- ---------
Corporate derives its funds principally from (i) dividends
and interest income from the Insurance Group; (ii) tax payments
pursuant to tax sharing agreements and management fees from its
subsidiaries; and (iii) investment income from Corporate
liquidity. Regulatory constraints historically have not affected
the Company's consolidated liquidity, although state insurance
laws have provisions relating to the ability of the parent
company to use cash generated by the Insurance Group to fund
operating expenses and dividend payments at Corporate.
During the second quarter of 1997, the Company sold its
remaining real estate in Florida for a gain of $1.0 million, and
continues to pursue the sale of its small real estate portfolio.
The sale of the remaining real estate would also have a non-
recurring positive impact on the Company's earnings; the effect
thereof on stockholders' equity would not be material.
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $17.9 million
at September 30, 1997. At the present time, the Company is not
in need of any additional long-term financing.
In the second quarter of 1997, the Board of Directors of IHC
approved the continuation of its share repurchase program and
authorized the acquisition in the open market of up to 750,000
shares of IHC's common stock (approximately 10% of the
outstanding). The timing and price of any purchases will be at
the sole discretion of IHC's management, and the program may be
discontinued or suspended at any time (since the initiation of
IHC's repurchase program in 1991, approximately 1,700,000 net
shares have been acquired at a cost of $8.3 million).
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 acquisitions or otherwise expand
its operations.
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 value) or
as available-for-sale (carried at fair value); the Company has
chosen to carry all of its debt securities as available-for-sale.
16
<PAGE>
Primarily as a result of the decrease in interest rates, the
Company experienced a change in unrealized gains of $3.1 million,
net of deferred tax expense, in total stockholders' equity,
reflecting unrealized gains of $1.6 million at September 30, 1997
versus unrealized losses of $1.5 million at December 31, 1996.
The Company has historically had relatively low federal
income tax expense due to the utilization of tax loss
carryforwards; it is anticipated that, all of the remaining tax
benefits associated with the utilization of tax loss
carryforwards will be recognized during the fourth quarter of
1997, except for remaining tax benefits associated with acquired
tax loss carryforwards which are limited as to their utilization.
Some of the statements included within Management's
Discussion and Analysis may be considered to be forward looking
statements which are subject to certain risks and uncertainties.
Factors which could cause the actual results to differ materially
from those suggested by such statements are described from time
to time in the Company's Annual report on Form 10-K and other
filings with the Securities and Exchange Commission.
New Accounting Pronouncements
- -----------------------------
In June 1996, the Financial Accounting Standards Board
("FASB") issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." In December 1996, FASB issued SFAS No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125." The requirements of SFAS No. 125 have been
deferred by SFAS No. 127 for those types of transactions that are
entered into by the Company and would be effective after December
31, 1997, and are to be applied prospectively. Earlier or
retroactive application is not permitted. The Company is
currently evaluating the Statement, but does not believe it will
have a material impact on the Company.
In February 1997, FASB issued SFAS No. 128, "Earnings per
Share," which changes the calculation of both primary and fully
diluted earnings per share. The requirements of SFAS No. 128 are
effective for financial statements for periods ending after
December 15, 1997, and require the restatement of all prior
periods earnings per share calculations. Earlier application is
not permitted. Under SFAS No. 128, the calculation of earnings
per share and earnings per share-assuming dilution for IHC for
each of the three and nine months ended September 30, 1997 and
1996 will not be materially different than primary earnings per
share.
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income," and FASB No. 131, "Disclosure about
Segments of an Enterprise and Related Information." The
requirements for both SFAS No. 130 and No. 131 are effective for
financial statements for periods ending after December 15, 1997.
The Company is currently evaluating the impact of SFAS No. 130
and No. 131 on the financial statements.
17
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation
of per share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended September 30, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
INDEPENDENCE HOLDING COMPANY
----------------------------
(THE REGISTRANT)
Dated: November 12, 1997 By:/s/Roy T.K. Thung
-------------------------
Roy T.K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: November 12, 1997 By:/s/Teresa A. Herbert
-------------------------
Teresa A. Herbert
Vice President and
Controller
19
<PAGE>
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------------- -------------------
PRIMARY EARNINGS PER SHARE
- --------------------------
INCOME:
Income from continuing
operations...................$ 2,825 $ 1,956 $ 8,276 $ 4,788
Income from discontinued
operations, net.............. - 531 - 1,558
------- ------- ------- -------
Net income....................$ 2,825 $ 2,487 $ 8,276 $ 6,346
======= ======= ======= =======
SHARES:
Weighted average common
shares outstanding........... 7,432 7,432 7,432 7,432
Shares assumed issued for
options...................... 170 68 117 57
------- ------- ------- -------
Average common and common
equivalents shares
outstanding.................. 7,602 7,500 7,549 7,489
======= ======= ======= =======
INCOME PER SHARE:
Primary income per share
from continuing operations...$ .37 $ .26 $ 1.10 $ .64
Primary income per share from
discontinued operations...... - .07 - .21
------- ------- ------- -------
Primary net income per share..$ .37 $ .33 $ 1.10 $ .85
======= ======= ======= =======
FULLY DILUTED EARNINGS
PER SHARE (A)
- ----------------------
USE OF PROCEEDS:
Assumed exercise of warrants.$ 32,182 $ 32,182 $ 32,182 $ 32,182
Assumed exercise of options.. 2,586 2,405 2,586 2,405
Repurchase of treasury stock
at average market price of
$11.14, $8.77, $8.80, and
$8.39, respectively......... (16,558) (13,036) (13,080) (12,471)
Assumed payment of debt
outstanding................. - (10,083) - (11,097)
------- ------- ------- -------
Assumed balance to be
invested....................$ 18,210 $ 11,468 $ 21,688 $ 11,019
======= ======= ======= =======
INCOME:
Net income from continuing
operations..................$ 2,825 $ 1,956 $ 8,276 $ 4,788
Pro-forma interest income.... 341 215 1,220 620
Pro-forma reduction of
interest expense............ - 189 - 624
------- ------- ------- -------
Adjusted net income from
continuing operations....... 3,166 2,360 9,496 6,032
Income from discontinued
operations, net............. - 531 - 1,558
------- ------- ------- -------
Adjusted net income..........$ 3,166 $ 2,891 $ 9,496 $ 7,590
======= ======= ======= =======
SHARES:
Weighted average shares
outstanding................. 7,432 7,432 7,432 7,432
Shares assumed issued for
warrants.................... 1,966 1,816 1,966 1,816
Shares assumed issued for
options..................... 383 338 383 338
Treasury stock assumed
purchased................... (1,486) (1,486) (1,486) (1,486)
------- ------- ------- -------
Adjusted average shares
outstanding................. 8,295 8,100 8,295 8,100
======= ======= ======= =======
INCOME PER SHARE:
Fully diluted income per
share from continuing
operations..................$ .38 $ .29 $ 1.14 $ .75
Fully diluted income per
share from discontinued
operations.................. - .07 - .19
------- ------- ------- -------
Fully diluted net income
per share...................$ .38 $ .36 $ 1.14 $ .94
======= ======= ======= =======
(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.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-Q for the period ended September 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 183,504,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,391,000
<MORTGAGE> 314,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 268,095,000
<CASH> 1,325,000
<RECOVER-REINSURE> 86,944,000
<DEFERRED-ACQUISITION> 10,959,000
<TOTAL-ASSETS> 386,949,000
<POLICY-LOSSES> 151,233,000
<UNEARNED-PREMIUMS> 23,735,000
<POLICY-OTHER> 65,535,000
<POLICY-HOLDER-FUNDS> 2,268,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,432,000
<OTHER-SE> 80,746,000
<TOTAL-LIABILITY-AND-EQUITY> 386,949,000
60,557,000
<INVESTMENT-INCOME> 15,763,000
<INVESTMENT-GAINS> (70,000)
<OTHER-INCOME> 2,165,000
<BENEFITS> 43,231,000
<UNDERWRITING-AMORTIZATION> 2,195,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 9,412,000
<INCOME-TAX> 1,136,000
<INCOME-CONTINUING> 8,276,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,276,000
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 00
</TABLE>
