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, 1996
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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]
7,431,769 shares of common stock were outstanding as of March
14, 1997 (adjusted for the one-for-two reverse stock split of the
Company's shares of Common Stock effective June 28, 1996).
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 14, 1997 was
$24,026,474.
The Exhibit Index is located on page 74 of this filing.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of
Stockholders scheduled for June 4, 1997 are incorporated by
reference into Part III of this filing.
<PAGE>
PART 1
ITEM 1. BUSINESS
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Independence Holding Company, a Delaware corporation ("IHC"),
is a financial services 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."
Standard Life, which has an A (Excellent) rating from A.M.
Best & Company, Inc. ("Best"), is domiciled in New York and
licensed as an insurance company in all 50 states, the District of
Columbia, the Virgin Islands and Puerto Rico. Madison Life, which
is domiciled in Wisconsin and licensed to sell insurance products
in 44 states, the District of Columbia and the Virgin Islands, was
upgraded to a B++ (Very Good) rating by Best during the second quarter
of 1996. First Standard is domiciled in Delaware and licensed to
write and reinsure property and casualty insurance in that State
and New York State.
On December 31, 1996, IHC consummated the distribution of the
common stock of its majority-owned sign manufacturing subsidiary,
Zimmerman Sign Company ("Zimmerman"), on a pro rata basis to the
holders of record of IHC common stock as of December 20, 1996.
Since December 1995, the Consolidated Financial Statements of the
Company have been restated to present Zimmerman as discontinued
operations (see Notes 2 and 10 of Notes to Consolidated Financial
Statements).
For information pertaining to the Company's business
segments, reference is made to Note 18 of Notes to Consolidated
Financial Statements.
PRINCIPAL PRODUCTS AND SERVICES
Medical Stop-Loss
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Standard Life markets, throughout the United States, stop-
loss insurance for self-insured group medical plans. These plans
allow self-insured employers to manage the risk of excessive
health insurance exposures by limiting aggregate and specific
losses to a predetermined amount. Self-insured plans permit
employers flexibility in designing employee health coverages at a
cost that may be lower than that available through managed care or
traditional indemnity plans.
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<PAGE>
Employer stop-loss coverage is available on either a specific
or a specific and aggregate basis, although the majority of the
policies issued by Standard Life cover both specific and aggregate
claims. Standard Life designs plans to fit the identified needs
of the self-insured employer by offering a variety of attachment
points (i.e., the level of reinsurance claims after which the
stop-loss benefits become payable) and, with respect to specific
coverage, various deductible options.
Standard Life markets its medical stop-loss products through
a network of managing general underwriters ("MGUs") who are non-
salaried independent contractors that receive administrative fees.
During 1996, Standard Life marketed through ten different MGUs.
The MGUs are responsible for underwriting accounts in accordance
with guidelines established and/or approved by Standard Life,
billing and collecting premiums from the employers, paying
commissions to third party administrators and/or brokers, and
adjudicating reinsurance claims. Standard Life is responsible for
establishing underwriting guidelines, selecting MGUs and reviewing
employers' claims for reimbursement, as well as establishing
appropriate accounting procedures and reserves.
The Company believes that prospects for continued growth in
Standard Life's medical stop-loss business are favorable.
Although federal and state legislative and regulatory bodies have
proposed various healthcare initiatives in recent years, any such
initiatives that could ultimately be implemented should continue
to recognize employers' self-insurance of healthcare benefits as
a viable and cost-effective method of financing healthcare for
employees and their families.
New York Short-Term Disability
- ------------------------------
Standard Life markets a short-term statutory disability
benefit product in New York State ("DBL"). All companies with
more than one employee in New York State are required to provide
DBL insurance for their employees. DBL coverage provides temporary
cash payments to replace wages lost as a result of disability due
to non-occupational injury or illness. The DBL policy provides for
(i) payment of 50% of salary to a maximum of $170 per week; (ii)
a maximum of 26 weeks in a consecutive 52 week period; and (iii)
benefit commencement on the eighth consecutive day of disability.
Policies covering fewer than 50 employees have fixed rates
approved by the New York State Insurance Department. Policies
covering 50 or more employees are individually underwritten. The
DBL business is marketed primarily through independent general
agents who are paid commissions based upon the amount of premiums
produced. The Company anticipates expanding the DBL business
through the addition of general agents and acquisition of blocks
of business.
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Group Term Disability and Life
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Group Long-Term and Short-Term Disability
Madison Life sells group long-term and short-term disability
products to employers that wish to provide this benefit to their
employees. Depending on an employer's requirements, long-term
disability policies (i) cover between 50% and 70% of insurable
salary; (ii) have elimination periods (i.e., the period between
the commencement of the disability and the start of benefit
payments) of between 30 and 730 days; and (iii) terminate after
two, five or ten years or extend to age 65. Optional benefits are
available to employees, including coverage for partial or residual
disabilities, survivor benefits and cost of living adjustments.
Short-term disability policies provide a weekly benefit to
disabled employees until they are eligible for long-term
disability benefits.
Madison Life's disability products are sold primarily in the
Midwest to school districts, municipalities and hospital employer
groups through a managing general agent ("MGA") that specializes
in these target markets. The MGA assists in the billing and
administration of the business, and is paid commissions based upon
the amount of premiums produced. Beginning in 1996, Madison Life
expanded its marketing to non-governmental businesses through non-
salaried independent general agents and agents who are paid
commissions based upon the amount of premiums produced. Also in
1996, Madison Life entered into an agreement with another insurer
to sell group long-term disability in markets in which Madison
Life is not currently established. Under the agreement, the other
insurer will issue policies as to which the underwriting, claims
processing and related services will be performed by Madison Life
for a fee; Madison Life will assume 25% of the risk on this
business.
Madison Life intends to increase sales by targeting non-
governmental business, utilizing its new alliance and maximizing
its traditionally strong sales to school districts, municipalities
and hospital employer groups.
Group Term Life
Madison Life sells group term life products which are
marketed primarily to the same customers that purchase its group
short-term and long-term disability products. These products
include group term life, accidental death and dismemberment
("AD&D"), supplemental life and AD&D and dependent life. In order
to enhance its marketing and retention of this line of business,
Madison Life also offers a paid-up life benefit for eligible
employees of schools and municipalities beginning at age 65,
subject to a vesting schedule. Madison Life's group term life
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products are distributed by the same MGA and independent general
agents and agents that distribute its group disability products,
with compensation based upon the amount of premium produced.
As with its group disability business, Madison Life intends
to expand its sales of group life products to non-governmental
entities.
Standard Life markets group life insurance to employers who
self-insure or enroll in health maintenance organizations
("HMOs"). Standard Life's group term life products are marketed
through licensed independent general agents and agents or brokers
who are paid commissions.
Credit Life and Disability
- --------------------------
Madison Life sells credit life and disability products
offered by entities that extend credit (e.g. banks, thrifts,
credit unions and finance companies) or arrange for the extension
of credit (e.g. automobile, marine and furniture dealerships)
insuring the debtor for a value and duration not to exceed the
amount and repayment term of the indebtedness. Credit insurance
is composed of two basic types of coverage: (i) credit life
insurance provides for a lump sum benefit paid to the creditor
upon the death of the insured debtor to extinguish or reduce the
balance of indebtedness; and (ii) credit disability insurance
provides a monthly benefit/indemnity (usually a sum equal to the
scheduled monthly loan payment) paid to the creditor in the event
of the insured debtor's total disability until the debtor recovers
or until the scheduled expiration of the insurance coverage,
whichever first occurs.
Generally, Madison Life's coverage is limited as follows: (i)
at inception of coverage, insureds must be under age 70 for life
and under age 65 for disability; (ii) coverage terminates at age
71 for life and age 66 for disability; (iii) maximum life
insurance or aggregate disability benefits are $100,000, and the
maximum monthly disability benefit is $1,000; and (iv) the maximum
term of coverage is 120 months.
Approximately 82% of Madison Life's credit insurance premiums
are written through credit unions. This business is marketed by
non-salaried independent general agents and agents who are paid
commissions based upon the amount of premiums produced.
Madison Life intends to expand its credit life and disability
business through greater geographical diversification, agreements
to administer blocks of business for other insurers, joint
marketing alliances with other insurers and acquisitions.
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Managed Health Care
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HMO Reinsurance
Standard Life has developed and markets a reinsurance product
for HMOs that desire to reduce their risk assumption and/or are
required to purchase this coverage by regulation. A majority of
state regulatory authorities responsible for HMO oversight require
such coverage. Standard Life reinsures 32 HMOs in 17 states on a
specific excess basis only. Coverage is offered on a per member
basis for catastrophic claims and for a limited form of
continuation of benefits for covered members in the event of the
insolvency of the HMO. Standard Life markets HMO reinsurance
through one specialized independent reinsurance manager with an
experienced management and staff knowledgeable in reinsurance
issues specifically facing HMOs. In addition, final authority for
all financial decisions remains with Standard Life, although
financial reviews of each HMO are performed on behalf of Standard
Life by an independent firm whose primary business is managed
care. Standard Life maintains a low risk profile by reducing its
exposure through quota share reinsurance arrangements.
HMO Point-of-Service (POS)
Standard Life has capitalized on the competitive pressures in
the HMO market by marketing point-of-service ("POS") coverage.
Both mature and start-up HMOs are experiencing difficulty in
attracting and retaining members unless they are able to offer an
out-of-network alternative. A POS product allows a member greater
freedom of choice of providers and/or the ability to access care
without a gatekeeper or primary care physician referral. Most
states require that HMOs desiring to offer a POS product do so by
partnering with an indemnity carrier (such as Standard Life).
While the marketing of the POS product began in 1995 with its
behavioral health carve-out product, Standard Life accelerated its
sales efforts and committed more of its resources to this sector
in 1996. Standard Life has met to discuss its POS product with at
least 20 of its HMO reinsurance clients, designed and developed
products and signed administrative agreements with 10 of such HMOs
in 7 states, and anticipates closing an additional 6 to 10
agreements in 1997. Standard Life markets its other products
(such as employer stop-loss and group life) to the employer groups
who purchase its POS product.
Managed Care Investments
Madison Life, through an investment subsidiary, participates
in two development-stage ventures which develop and coordinate
insurance products and services and provide reinsurance to
provider health care organizations and provider sponsored
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health plans through their proprietary market databases and
alliances with various partners.
The Company anticipates increasing its presence in managed
health care through Standard Life's HMO reinsurance, POS, and
related products and Madison Life's managed care investments. In
addition, the Company actively seeks opportunities to enter into
cooperative underwriting and reinsurance arrangements with other
life and health insurers, reinsurers, HMOs, and managed care
companies that it believes would augment its existing businesses.
Special Disability
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During the last half of 1996, Standard Life commenced
providing disability income, accident medical, accidental death,
and AD&D insurance to athletes, executives and entertainers. The
coverage is written for a limited term (5 years or less) and is
optionally renewable by Standard Life. The principal benefits
offered are permanent total disability ("PTD") and temporary total
disability ("TTD"). PTD is paid as a lump sum if caused by either
an injury or sickness or by an injury only, which is career
ending. TTD covers the same risks as PTD, but is paid in
installments until the maximum limit of insurance is exhausted or
the insured no longer has a total disability. For these special
risks, Standard Life has delegated marketing and underwriting
authority to a specialized MGU who has concentrated its efforts in
these markets for more than 15 years. Currently, Standard Life
insures no more than half of the value of the contract, thereby
sharing the risk with another party (e.g., a team or a corporate
sponsor). In addition, Standard Life has minimized its risk by
obtaining reinsurance on a quota share basis.
Acquired Blocks/Other Business
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This category of the Company's insurance products includes:
(i) insurance products which are in runoff as a result of the
Insurance Group's decision to discontinue writing such products;
(ii) blocks of business which were acquired from other insurance
companies but which are not of the type currently being written by
the Insurance Group (blocks which are still being written are
included within a specified product group); and (iii) certain
miscellaneous insurance products. The following lines of Standard
Life's in-force business are in runoff: individual accident and
health, individual life, single premium immediate annuities, and
miscellaneous insurance business. Madison Life's runoff consists
of existing blocks of individual life (including pre-need (i.e.,
funeral expense coverage) and interest-sensitive whole life blocks
which were acquired in 1996), individual accident and health
products, annual and single premium deferred annuity business and
individual annuity policies.
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<PAGE>
The following table sets forth gross direct earned premiums,
net premium income and operating income (before realized gains
(losses) and income taxes) by principal product for the years
indicated (dollars in thousands):
GROSS DIRECT EARNED PREMIUMS
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1996 1995 1994
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Medical Stop-Loss................. $ 83,182 $ 72,153 $ 67,091
DBL............................... 16,673 15,604 17,062
Group Term Disability and Term Life 19,201 16,241 11,360
Credit Life and Disability........ 13,921 13,623 14,138
Managed Health Care............... 7,607 2,170 -
Special Disability................ 1,604 - -
Acquired Blocks/Other Business.... 7,885 7,393 7,125
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TOTAL.......................... $ 150,073 $ 127,184 $ 116,776
========= ========= =========
NET PREMIUM INCOME
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1996 1995 1994
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Medical Stop-Loss................. $ 20,272 $ 13,567 $ 10,107
DBL............................... 16,673 15,604 17,062
Group Term Disability and Term Life 6,896 5,871 4,185
Credit Life and Disability........ 11,549 10,916 10,691
Managed Health Care............... 4,473 1,008 -
Special Disability................ 10 - -
Acquired Blocks/Other Business.... 9,712 9,435 8,578
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TOTAL.......................... $ 69,585 $ 56,401 $ 50,623
========= ========= =========
OPERATING INCOME (BEFORE REALIZED GAINS (LOSSES) AND INCOME TAXES)
------------------------------------------------------------------
1996 1995 1994
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Medical Stop-Loss................. $ 3,629 $ 2,889 $ 2,248
DBL............................... 730 619 633
Group Term Disability and Term Life 501 598 414
Credit Life and Disability........ 1,164 883 (898)
Managed Health Care............... 735 188 -
Special Disability................ (25) - -
Acquired Blocks/Other Business.... 3,097 3,034 4,306
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TOTAL.......................... $ 9,831 $ 8,211 $ 6,703
========= ========= =========
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The following table summarizes the aggregate life insurance
in-force of the Insurance Group (dollars in thousands):
1996 1995 1994
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LIFE INSURANCE IN-FORCE:
Group...........................$3,759,716 $3,211,771 $2,156,780
Individual term................. 343,674 405,547 460,714
Individual permanent............ 454,386 438,900 502,940
Credit.......................... 494,506 518,593 539,990
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TOTAL LIFE INSURANCE
IN-FORCE (1), (2).............$5,052,282 $4,574,811 $3,660,424
========= ========= =========
NEW LIFE INSURANCE:
Group...........................$ 953,327 $ 529,900 $ 835,024
Individual term................. 91 536 133
Individual permanent............ 339 1,271 328
Credit.......................... 233,066 258,493 249,831
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TOTAL NEW LIFE INSURANCE.......$1,186,823 $ 790,200 $1,085,316
========= ========= =========
NOTES:
(1) Includes participating
insurance...................$ 31,928 $ 30,637 $ 38,331
========= ========= =========
(2) Includes ceded reinsurance of:
Group.......................$1,828,969 $1,553,234 $1,175,196
Individual.................. 342,689 380,793 473,507
Credit...................... 43,875 54,938 76,252
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Total ceded reinsurance....$2,215,533 $1,988,965 $1,724,955
========= ========= =========
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ACQUISITIONS
The Company has assembled a team of senior executives which
is responsible for locating, analyzing and administering
acquisitions. The team members, who have been involved with
numerous acquisitions, focus primarily on transactions involving
the purchase of blocks of policies, but also evaluate acquisitions
of entire companies. The Company believes that current trends in
the life and health insurance industry provide excellent
opportunities for acquisitions and consolidations. Some companies
are reducing administrative costs by divesting of divisions,
insurance subsidiaries and blocks of business which do not fit
their overall strategies, or are disposing of non-core businesses
in order to focus their capital on their primary lines. Other
companies are experiencing increased difficulty in remaining
competitive due to more stringent regulatory requirements
(including risk based capital ratios), downgrades by rating
agencies, the increased cost of sophisticated information
processing systems and the inaccessibility to capital markets.
Mutual companies and non-profit entities, in particular, may have
difficulty accessing sources of capital.
Historical
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Madison Life acquired two blocks of business in 1994 with
aggregate reserves of over $1,400,000 and annualized aggregate
premiums of $925,000. These policies were acquired from companies
disposing of unwanted run-off blocks.
Madison Life acquired two blocks of business in 1995 with
aggregate reserves of over $2,740,000. One block, comprised of a
minimal number of policies, was acquired from a state guaranty
association and favorably positioned Madison Life to acquire
blocks from troubled companies in the future. The other block was
acquired from a company exiting the ordinary life line of
business.
Madison Life acquired three blocks of business in 1996,
including a block of pre-need individual ordinary life insurance
and annuity policies with reserves of approximately $33,000,000
from a large insurer divesting this line of business, and a block
of interest-sensitive whole life insurance with reserves of
approximately $7,500,000 from the National Organization of Life
and Health Guaranty Associations.
Standard Life has actively sought acquisition opportunities
with other insurance companies (i) whose DBL business no longer
fits their marketing strategy; or (ii) that cannot administer
their in-force DBL block profitably. As a result, Standard Life
has reduced its administration costs on a per policy basis and
gained access to new general agents and brokers. During 1996,
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Standard Life acquired two DBL blocks from two insurers with total
estimated annualized premiums of approximately $3,500,000.
Outlook
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The Company has positioned itself to increase its activity
in the acquisition field by its contribution of $5,000,000 to
Madison Life in the fourth quarter of 1996 (following a
contribution of $15,000,000 in 1993). These contributions served
to further enhance the Insurance Group's already superior capital
ratios, broad licensing and excellent asset quality. The Company
currently has no indebtedness, and anticipates that it can use its
current liquidity and/or raise additional capital in the public or
private markets to the extent determined to be necessary or
desirable in order to pursue acquisitions. In anticipation of
increased opportunities, Madison Life and Standard Life have
significantly improved their administration systems, enabling them
to more efficiently manage acquired blocks.
The Company is particularly interested in acquiring
traditional life policies, interest-sensitive life polices, credit
life and health policies, limited benefit health policies (e.g.
cancer or hospital indemnity policies), DBL and certain other
disability policies. The Company would consider acquiring
annuities to a lesser extent in order to effectuate an acquisition
of more desired types of policies.
REINSURANCE AND POLICY RETENTION LIMITS
Although the Company has more than sufficient capital to
retain greater risk, the Company has emphasized, in recent years,
maintaining a low risk profile on its insurance products, while
increasing fee income and reinsurance allowances generated by
underwriting, auditing, marketing, regulatory, administrative and
related services. During the past three years, such income and
allowances have grown as a result of an increase in the Company's
premium volume. The Company's low risk profile dictates
purchasing reinsurance and excess reinsurance. The Company
monitors its retention amounts by product, and can and does adjust
its retention as appropriate.
Reinsurance is used to reduce the potentially adverse
financial impact of large individual risks and to reduce the
strain on statutory income and surplus related to new business. By
using reinsurance, the Insurance Group is able to write policies
in amounts larger than it 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, 1996 were: (i) $210,000 per life on individual
life and corresponding disability waiver of premium; (ii) no
retention on accidental death benefits provided by rider to
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individual life policies; (iii) up to $250,000 on any one stop-
loss claim; (iv) a maximum of $2,500 of monthly benefits on
disability income policies; and (v) up to $25,000 on its special
disability business. Standard Life has purchased excess
reinsurance for its stop-loss business on the portion of risks
which it retains in order to further limit its exposure. Standard
Life also maintains stop-loss and catastrophe reinsurance in order
to protect against particularly adverse mortality which might
occur with respect to its overall life business.
Current maximum retention limits for Madison Life are: (i) up
to $2,500 per month on group long-term and short-term disability
insurance; (ii) $25,000 on group term life, substandard ordinary
life, group credit single premium life, group family life and
individual ordinary life; (iii) $600 per month on individual
substandard long-term disability insurance; (iv) $1,000 per month
on credit disability insurance; and (v) $600 maximum monthly
benefit on individual accident and health insurance. There is no
retention on accidental death benefits provided by rider to group
life policies. In addition, Madison Life has purchased additional
reinsurance on the portion of risks which it retains, limiting its
exposure on a catastrophic (aggregate) loss.
The Insurance Group remains liable with respect to the
insurance in-force which has been reinsured in the unlikely event
that the assuming reinsurers are unable to satisfy their
obligations. The Insurance Group cedes business to individual
reinsurance companies that are, and reinsurance pools comprised of
companies that are, rated A or better by Best, or upon provision
of adequate security. The ceding of reinsurance does not
discharge the primary liability of the original insurer to the
insured, but it is the practice of insurers (subject to certain
limitations of state insurance statutes) to account for risks
which have been reinsured with other approved companies, to the
extent of the reinsurance, as though they are not risks for which
the original insurer is liable. Since the risks under the
Insurance Group's business are primarily short-term, there would
be limited exposure as a result of a change in a reinsurer's
creditworthiness during the term of the reinsurance. At December
31, 1996, the Insurance Group's ceded reinsurance in-force was
$2.2 billion.
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
Group establishes 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
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to meet anticipated future policy obligations. Premiums and
reserves are based upon certain assumptions with respect to
mortality, morbidity on health insurance, lapses and interest
rates effective at the time the policies are issued. The Insurance
Group also establishes 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. Standard Life, Madison Life
and First Standard invest their respective assets which support
the reserves and other funds in accordance with applicable
insurance law, under the supervision of their respective Boards of
Directors.
The following table reflects the asset value in dollars and
as a percentage of total investments of the Company as at December
31, 1996 (dollars in thousands):
INVESTMENTS BY TYPE DECEMBER 31, 1996
- ------------------- -----------------------------
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
-----------------------------
Fixed maturities:
Bonds:
United States Government and
authorities........................ $134,191 54.0%
States, municipalities and
political subdivisions............. 1,579 0.6%
Public utilities.................... 17,257 7.0%
All other corporate securities...... 12,013 4.8%
------- ----
Total fixed income securities........ 165,040 66.4%
------- ----
Equity securities:
Common stocks:
Banks, trusts and insurance......... 210 0.1%
Industrial, miscellaneous and other. 2,672 1.1%
Non-redeemable preferred stock....... 1,545 0.6%
------- ----
Total equity securities.............. 4,427 1.8%
------- ----
Financial instruments sold, but not yet
purchased:
Common stocks:
Industrial, miscellaneous and other. (539) -0.2%
------- ----
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INVESTMENTS BY TYPE (continued) DECEMBER 31, 1996
- ------------------------------ -----------------------------
PERCENT OF TOTAL
ASSET VALUE INVESTMENTS
-----------------------------
Securities purchased under agreements
to resell................................. 36,542 14.7%
Partnership interests...................... 23,417 9.4%
Mortgage loans............................. 373 0.2%
Policy loans............................... 6,582 2.6%
Real estate................................ 811 0.3%
Other...................................... 1,500 0.6%
Short-term investments..................... 10,316 4.2%
------- -----
Total investments.................... $248,469 100.0%
======= =====
At December 31, 1996, approximately 95% of the Company's
fixed maturities were investment grade. The composition of the
Company's fixed maturities at December 31, 1996, utilizing
Standard and Poor's rating categories, was as follows:
GRADE PERCENTAGE INVESTED
----- -------------------
AA 81.3%
AA 7.0%
A 2.5%
BBB 4.2%
BB or lower 5.0%
-----
100.0%
=====
COMPETITION AND REGULATION
The Company competes with many larger insurance companies,
HMOs 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. HMOs may also have certain
competitive advantages since they are subject to different
regulations than insurance companies. As more companies enter the
acquisition field, the Company may face increased competition for
future acquisitions.
IHC is an insurance holding company; as such, IHC and the
Insurance Group 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. Each of Standard Life, Madison Life and
First Standard is also subject to regulation and supervision in
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all jurisdictions in which it is 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 or holding 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 department 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.
Risk-based capital requirements are imposed on life and
property and casualty insurance companies. The risk-based capital
ratio is determined by dividing an insurance 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 risk-based
capital ratios for each of Standard Life, Madison Life and First
Standard significantly exceed such minimum ratios.
EMPLOYEES
---------
At December 31, 1996, the Company had 99 employees.
- 15 -
<PAGE>
ITEM 2. PROPERTIES
----------
IHC
IHC has entered into a renewable short-term arrangement with
Geneve Corporation for the use of approximately 6,500 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 11,000 square feet of
office space in Middleton, Wisconsin as its corporate
headquarters.
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.
- 16 -
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
IHC's common stock and share purchase warrants expiring June
30, 2001 ("Warrants") are traded over-the-counter. The common
stock trades on the Nasdaq National Market tier of the Nasdaq
Stock Market 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 last 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, 1996............ 9 6 3/4 1/16 1/32
September 30, 1996........... 9 5/8 8 1/4 1/16 1/16
June 30, 1996................ 9 5/8 7 7/8 1/16 1/16
March 31, 1996............... 8 7 1/4 1/16 1/16
QUARTER ENDED:
December 31, 1995............ 8 6 1/4 1/16 1/100
September 30, 1995........... 8 6 3/8 3/20 1/100
June 30, 1995................ 7 6 1/8 3/20 1/100
March 31, 1995............... 6 3/4 6 3/20 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 14, 1997, the number of record holders of IHC's (i)
common stock was 3,067 and (ii) Warrants was 1,262.
IHC declared a dividend of $.05 and $.04 per share on its
common stock on December 30, 1996 and November 16, 1995,
respectively.
Effective June 28, 1996, the Company declared a one-for-two
reverse stock split of the Company's shares of common stock. The
above table and the per share dividend amounts have been restated
to reflect such transaction.
On December 31, 1996, IHC distributed the common stock of
Zimmerman on a pro rata basis to the holders of record of IHC's
common stock as of December 20, 1996. The ex-date for the
distribution was December 18, 1996.
- 17 -
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a summary of selected consolidated financial
data of the Company for each of the last five years.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA:
Total revenues..............$ 89,344 $ 71,427 $ 61,504 $ 65,444 $ 67,304
Net realized and unrealized
gains (losses)............. 190 - (1,921) 835 3,271
Income applicable to
common shares from
continuing operations
before cumulative effect
of accounting changes...... 6,710 6,172 2,396 4,041 3,010
BALANCE SHEET DATA:
Total investments........... 249,008 185,867 179,856 184,790 169,810
Total assets................ 336,401 286,207 266,368 276,989 249,530
Insurance policy benefits,
claims and other policy
liabilities................ 202,278 158,233 150,988 159,090 149,083
Long-term debt.............. - 12,111 14,111 15,161 161
Common stockholders'
equity..................... 76,856(1) 71,607 55,694 62,051 57,205
PER SHARE DATA:
Cash dividends declared per
common share...............$ .05 $ .04 $ .04 $ .04 $ .04
Income per common
share from continuing
operations before
cumulative effect of
accounting changes.........$ .90 $ .81 $ .31 $ .50 $ .34
Book value per common share.$ 10.34(1)$ 9.63 $ 7.17 $ 7.84 $ 7.12
(1) Excludes the credit of $7,905,000 to common stockholders'
equity (or $1.06 of book value per common share) that would
be recorded upon termination of the guarantee of Zimmerman's
indebtedness by a subsidiary of the Company (see Note 10 of
Notes to Consolidated Financial Statements).
The above table has been restated to reflect (i) Zimmerman as
discontinued operations as described in Note 2 of Notes to
Consolidated Financial Statements, (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 and (iii) the one-for-two reverse stock split
of IHC's common stock effective June 28, 1996.
The Selected Financial Data should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto.
- 18 -
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
Independence Holding Company, a Delaware corporation ("IHC"),
is a financial services 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 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 (see Item 1 for a discussion of the business).
On December 31, 1996, IHC consummated the distribution of the
common stock of its majority-owned sign manufacturing subsidiary,
Zimmerman Sign Company ("Zimmerman"), on a pro rata basis to the
holders of record of IHC's common stock as of December 20, 1996.
Since December 1995, the Consolidated Financial Statements of the
Company have been restated to present Zimmerman as discontinued
operations (see Notes 2 and 10 of Notes to Consolidated Financial
Statements).
Additional information pertaining to the Company's business
segments is provided in Note 18 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
- ---------------------
The Company's operating income from continuing operations
increased $2.0 million, or 42%, to $6.8 million in 1996 from $4.8
million in 1995. The Company had net realized and unrealized gains
of $.2 million in 1996. Excluding net realized and unrealized
gains, the Company had operating income from continuing operations
of $6.6 million in 1996 as compared to $4.8 million for 1995. Net
income applicable to common shares was $7.8 million or $1.04 per
share for the year ended December 31, 1996 as compared to $8.2
million or $1.08 per share for the year ended December 31, 1995.
Income tax expense increased to $.1 million from a benefit of $1.4
million in 1995; reference is made to Note 15 of Notes to
Consolidated Financial Statements for a reconciliation of the
effective tax rate.
- 19 -
<PAGE>
Insurance Group
- ---------------
The Insurance Group's operating income increased 28% to $10.0
million in 1996 from $7.8 million in 1995. Operating income
includes net realized and unrealized gains of $.2 million in 1996
compared to $.4 million of losses in 1995. 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 (losses) was $9.8 million in 1996
compared to $8.2 million in 1995.
Premium revenues increased $13.2 million or 23% to $69.6
million in 1996 from $56.4 million in 1995; premium revenues at
Madison Life increased $2.5 million while Standard Life showed a
$10.7 million increase in premiums. The increase at Madison Life
is comprised of: a $.6 million increase in the credit lines of
business primarily due to new accounts added during 1996; a $.5
million increase in long-term disability premiums; a $.6 million
increase in the ordinary life and individual accident and health
lines of business primarily from the acquisition of a pre-need
(funeral expense coverage) block of business effective January 1,
1996; a $.4 million increase in group term life premiums; and a
$.4 million increase in other life and health lines of business.
The change at Standard Life is comprised of the following: $6.7
million in additional stop-loss premiums reflecting increased
retention along with the continued growth in this line of
business; $2.0 million from the development of a POS product; $1.3
million from the development of an HMO reinsurance product; and
$1.1 million in its DBL business due to an acquisition of a block
in the third quarter of 1996. All of the foregoing were offset by
a $.4 million decrease due to the continuing runoff in the closed
blocks of life, annuity and individual and group accident and
health lines of business.
Total net investment income increased $2.9 million due to a
realignment of the securities portfolio, higher returns on certain
equity investments, an increase in assets at Madison Life related
to the acquisition of the pre-need and interest-sensitive blocks
of business, and the infusion of a $5.0 million surplus note in
the fourth quarter of 1996. The annualized return on investments
in 1996 was 7.2% compared to 7.4% in 1995. Equity income
increased $.4 million due to a reduction in expenses sustained by
certain start-up insurance related partnerships in which the
Insurance Group invested in 1995.
Other income increased $.9 million from 1995 to 1996
resulting from: an increase of $.6 million in reinsurance
recoveries at Madison Life; an increase at Standard Life in stop-
loss fee income earned of $.4 million; $.8 million of
administrative fee income received from International Benefits
Administrators L.L.C., a third party administrator majority-owned
- 20 -
<PAGE>
by Standard Life (the "TPA"). The foregoing increases were offset
by a $.9 decrease in reinsurance recoveries.
Insurance benefits, claims and reserves increased $12.5
million, or 33%, reflecting an increase of $4.7 million at Madison
Life and $7.8 million at Standard Life. Madison Life's increase
resulted from the following: a $.8 million increase in ordinary
life and individual accident and health claims and reserves
primarily due to the acquisition of the pre-need block of
business; a $.5 million increase in long-term disability claims;
a $.6 million increase in group term life claims; a $.3 million
increase in claims and reserves in other life and health lines of
business; a $1.7 increase in interest credited to universal life
and annuity products primarily as a result of the acquisition of
the pre-need block of business and the interest sensitive whole
life block of business; and a $.8 million increase in the credit
line of business due to new accounts. The change at Standard Life
is comprised of the following increases: $4.9 million in stop-
loss claims incurred as a result of the increased retention and
the increased premiums in this line of business; additional claims
and reserves of $1.1 million relating to the POS product; $1.2
million in claims and reserves from the HMO reinsurance product;
$.6 million relating to the assumed block of group accident and
health line of business; and $.9 million in DBL claims due to
increased volume. The foregoing increases were offset by a $.9
million decrease in claims and reserves due to the continuing
runoff of the closed blocks of life, annuity and individual and
group accident and health lines of business.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group increased $3.3
million. Madison Life's expenses increased $.6 million primarily
due to the acquisition of new business. Standard Life's expenses
increased $2.7 million as a result of: a $.5 million increase in
commissions from the growth in business; and a $2.2 million
increase in general expenses due to administrative fees associated
with the higher retention of the stop-loss business, an increase
in salary and consulting expenses, general expenses attributable
to the TPA, and expenses attributable to new product development.
Corporate
- ---------
Operating losses for the year ended December 31, 1996
increased by $.2 million from 1995. Operating losses in 1995
include realized gains of $.4 million. Excluding net realized and
unrealized gains, operating losses decreased to $3.2 million in
1996 from losses of $3.4 million in 1995. Investment income
increased $.1 million, equity income increased $.1 million and
other income increased $.1 million from 1995. In connection with
the pro-rata distribution of Zimmerman's common stock in 1996, the
Company received a special cash dividend of $18.5 million, of
which $10.0 million was used to repay all of the Company's
- 21 -
<PAGE>
indebtedness; as a consequence, interest expense decreased $.4
million. Selling, general and administrative expenses increased
$.5 million.
1995 COMPARED TO 1994
- ---------------------
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. Net income applicable to
common shares was $8.2 million or $1.08 per share for the year
ended December 31, 1995 as compared to $4.2 million or $.54 per
share for the year ended December 31, 1994. Income tax benefits
increased to $1.4 million from $.7 million; reference is made to
Note 15 of Notes to Consolidated Financial Statements.
Insurance Group
- ---------------
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 economic and market
conditions, thus creating fluctuations in gains from one year to
the next. Operating income excluding net securities gains and
losses was $8.2 million for 1995 as compared to $6.7 million for
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
- 22 -
<PAGE>
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: 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 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
million; and a $.8 million increase in claims from the ordinary
life annuity, individual and group accident and health lines of
business primarily resulting 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
- 23 -
<PAGE>
increased $.1 million due to higher interest rates on the debt of
a corporate subsidiary, and general and administrative expenses
remained constant.
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.
Asset Quality
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 87% was invested in investment grade fixed income
securities, resale agreements, policy loans and cash and cash
equivalents at December 31, 1996. Also at such date, approximately
95% 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 December 31,
1996, approximately 5.0% 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 1.25% of
the Company's total investments were in real estate, non-
performing fixed maturities and mortgage loans.
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.
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
- 24 -
<PAGE>
expenses, interest and dividend payments at Corporate. In
connection with the distribution of Zimmerman, the Company
received a special cash dividend of $18.5 million, of which $10.0
million was used to repay all of the Company's indebtedness. Also
in connection with the distribution, a subsidiary of the Company
guaranteed $10.0 million of subordinated indebtedness of Zimmerman
(see Note 10 of Notes to Consolidated Financial Statements).
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $14.1 million at
December 31, 1996. At the present time, the Company is not in
need of any additional long-term financing.
OUTLOOK
-------
Business
- --------
Although federal and state legislative and regulatory bodies
have proposed various healthcare and insurance reform initiatives
in recent years, the Company anticipates that its insurance
products will continue to be viable in any such changed
environment.
The Company anticipates increasing its premium volume through
(i) greater geographical diversity; (ii) expansion of its network
of MGUs, MGAs, HMOs, general agents and agents; (iii) its role as
lead underwriter on reinsurance facilities; and (iv) acquisitions.
The Company is particularly interested in acquiring
traditional life policies, interest sensitive life polices, credit
life and health policies, limited benefit health policies (e.g.
cancer or hospital indemnity policies), DBL blocks, and certain
other disability policies. In anticipation of increased
acquisition opportunities, the Company contributed $5.0 million to
Madison Life in the fourth quarter of 1996 (following a
contribution of $15.0 million in 1993), and significantly improved
its administration systems, which enabled it to more efficiently
manage acquired blocks.
Some of the statements included within Management's
Discussion and Analysis may be considered to be forward looking
statements (as that term is defined in the Private Securities
Litigation Reform Act of 1995), and which are subject to certain
risks and uncertainties. Among those factors which could cause
the actual results to differ materially from those suggested by
such statements are the following: catastrophic losses in the
Company's insurance lines or a material aggregation of losses;
changes in federal or state law affecting the Company's insurance
products; availability of adequate retrocessional insurance
coverage at appropriate prices; stock and bond market volatility;
- 25 -
<PAGE>
the effect of changes required by generally accepted accounting
practices or statutory accounting practices; and other risks which
are described from time to time in the Company's filings with the
Securities and Exchange Commission.
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 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 increase in
interest rates, the Company experienced a change in unrealized
loss of $2.0 million, net of deferred tax benefits of $.8 million,
in total stockholders' equity, reflecting unrealized gains of $.5
million at December 31, 1995 versus unrealized losses of $1.5
million at December 31, 1996. The Company continues to employ
investment strategies to mitigate interest rate and other market
exposures.
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 the 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.
DISTRIBUTION OF ZIMMERMAN
-------------------------
On December 31, 1996, IHC consummated the distribution of the
common stock of Zimmerman on a pro rata basis to holders of record
of IHC's common stock as of December 20, 1996.
- 26 -
<PAGE>
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman Common Stock for each five
shares of IHC Common Stock, and cash in lieu of fractional shares.
IHC received a ruling from the Internal Revenue Service that the
distribution would be tax-free to IHC shareholders, and that IHC
would not recognize income, gain or loss as a result of the
transaction.
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33.0 million, of which $10.0 million consists of subordinated
debt guaranteed by a subsidiary of IHC. The proceeds of
borrowings by Zimmerman under such arrangements were used, among
other things, to repay all of its prior outstanding indebtedness
and to pay a $19.7 million special cash dividend to its
shareholders. From its $18.5 million portion of the special
dividend, the Company repaid all of its $10.0 million of
indebtedness, contributed $5.0 million to Madison Life in exchange
for a surplus note and used the balance for working capital.
Expenses of $1.1 million in connection with the distribution
transaction are recorded in discontinued operations, net on the
consolidated statement of operations.
As a result of the $10.0 million guarantee of Zimmerman's
subordinated debt, the credit to stockholders' equity of $7.9
million, 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.
- 27 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Index to Consolidated Financial Statements and
Schedules on page 31.
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 1997 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 1997 Annual Meeting of Stockholders, except
that the information required by paragraphs (i), (k) and (l)
of Item 402 Regulation S-K (sec. 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 1997 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 1997 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 31.
(3) EXHIBITS See Index to Exhibits on page 74.
(b) A report on Form 8-K was filed on January 10, 1997.
- 28 -
<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 24, 1997.
INDEPENDENCE HOLDING COMPANY
(REGISTRANT)
By/s/Edward Netter
----------------------------
Edward Netter
Chairman and
Chief Executive Officer
Director
(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 24th day of March, 1997.
/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
- 29 -
<PAGE>
/s/ Donald T. Netter
-----------------------------
Donald T. Netter
Director
/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)
- 30 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGES
- -----
INDEPENDENT AUDITORS' REPORT.............................. 32
CONSOLIDATED FINANCIAL STATEMENTS:
- ---------------------------------
Consolidated Balance Sheets at December 31, 1996
and 1995................................................. 33
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994......................... 34
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994..... 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994......................... 36-37
Notes to Consolidated Financial Statements................ 38-66
SCHEDULES:*
- ----------
Summary of investments - other than investments in
affiliates at December 31, 1996 (Schedule I)............. 67-68
Condensed financial information of parent company
(Schedule III)........................................... 69-72
Supplementary insurance information (Schedule V).......... 73
EXHIBIT INDEX............................................. 74
*All other schedules have been omitted as they are not applicable
or not required, or the information is given in the consolidated
financial statements, notes thereto or in other schedules.
- 31 -
<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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1996, 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.
KPMG PEAT MARWICK LLP
New York, New York
March 24, 1997
- 32 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 1995
- ----------------------------------------------------------------------------
ASSETS:
Cash and cash equivalents......................$ 10,361,000 $ 26,860,000
Short-term investments........................ 10,316,000 7,376,000
Securities purchased under agreements to resell
(Note 3)..................................... 36,542,000 5,195,000
Fixed maturities (Note 4)..................... 165,040,000 141,393,000
Equity securities (Note 4).................... 4,427,000 6,490,000
Other investments (Note 8).................... 32,683,000 25,413,000
----------- -----------
Total investments.............................. 249,008,000 185,867,000
Deferred insurance acquisition costs........... 11,221,000 9,156,000
Due and unpaid premiums........................ 5,122,000 3,465,000
Due from reinsurers............................ 50,877,000 44,588,000
Due from brokers............................... - 1,706,000
Notes and other receivables.................... 4,205,000 4,164,000
Other assets................................... 5,607,000 3,108,000
Net assets of discontinued operations (Note 2). - 7,293,000
----------- -----------
TOTAL ASSETS...............................$336,401,000 $286,207,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy benefits.........................$115,594,000 $103,872,000
Unearned premiums.............................. 11,654,000 12,665,000
Funds on deposit............................... 68,915,000 34,463,000
Insurance policy claims (Note 9)............... 3,914,000 5,162,000
Other policyholders' funds..................... 2,201,000 2,071,000
Financial instruments sold, but not yet
purchased (Note 4)............................ 539,000 836,000
Due to brokers................................. 19,740,000 22,136,000
Due to reinsurers.............................. 6,764,000 3,946,000
Accounts payable, accruals and other
liabilities................................... 18,653,000 12,423,000
Liability for business transferred (Note 10)... 7,905,000 -
Income taxes (Note 15)......................... 3,666,000 4,915,000
Long-term debt (Note 11)....................... - 12,111,000
----------- -----------
TOTAL LIABILITIES.......................... 259,545,000 214,600,000
----------- -----------
STOCKHOLDERS' EQUITY: (Notes 12, 13 and 14)
Preferred Stock (none issued).................... - -
Common stock, 7,431,769 and 7,432,274 shares
issued and outstanding, respectively, net of
2,188,950 shares in treasury.................... 7,432,000 7,432,000
Paid-in capital.................................. 76,068,000 76,245,000
Unrealized gains (losses) on investments, net.... (1,466,000) 495,000
Accumulated deficit.............................. (5,178,000) (12,565,000)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY................. 76,856,000 71,607,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$336,401,000 $286,207,000
=========== ===========
See accompanying notes to consolidated financial statements.
- 33 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
1996 1995 1994
- --------------------------------------------------------------------------
REVENUES:
Insurance premiums (Note 17).....$ 69,585,000 $ 56,401,000 $ 50,623,000
Net investment income (Note 6)... 16,917,000 13,885,000 12,708,000
Net realized and unrealized
gains (losses) (Note 7)......... 190,000 - (1,921,000)
Equity income (loss)............. (33,000) (527,000) 437,000
Other income (loss).............. 2,685,000 1,668,000 (343,000)
----------- ----------- -----------
89,344,000 71,427,000 61,504,000
----------- ----------- -----------
EXPENSES:
Insurance benefits, claims and
reserves........................ 49,788,000 37,345,000 32,817,000
Amortization of deferred
insurance acquisition costs..... 3,819,000 3,898,000 5,573,000
Interest expense................. 733,000 1,101,000 968,000
Selling, general and administra-
tive expenses................... 28,184,000 24,311,000 20,473,000
----------- ----------- -----------
82,524,000 66,655,000 59,831,000
----------- ----------- -----------
Operating income before income
taxes........................... 6,820,000 4,772,000 1,673,000
Income tax expense (benefit)
(Note 15)....................... 110,000 (1,400,000) (723,000)
----------- ----------- -----------
Income from continuing operations 6,710,000 6,172,000 2,396,000
Income from discontinued
operations, net (Note 2)........ 1,048,000 2,028,000 1,839,000
----------- ----------- -----------
Net income.......................$ 7,758,000 $ 8,200,000 $ 4,235,000
=========== =========== ===========
INCOME PER COMMON SHARE:
Income from continuing operations$ .90 $ .81 $ .31
Income from discontinued
operations, net................. .14 .27 .23
----------- ----------- -----------
Net income.......................$ 1.04 $ 1.08 $ .54
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING...................... 7,479,000 7,608,000 7,859,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
- 34 -
<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, 1993......... 7,910,258 $ 7,910,000 $78,065,000 $ 467,000 $(24,391,000) $62,051,000
Purchase of common stock
and warrants................... (145,894) (146,000) (863,000) (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......... 7,764,364 7,764,000 77,565,000 (9,168,000) (20,467,000) 55,694,000
Purchase of common stock
and warrants................... (332,090) (332,000) (1,919,000) (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........ 7,432,274 7,432,000 76,245,000 495,000 (12,565,000) 71,607,000
Purchase of common stock
and warrants................... (505) (5,000) (5,000)
Net change in unrealized gains.. (1,961,000) (1,961,000)
Net income...................... 7,758,000 7,758,000
Capital transactions of
subsidiary..................... (172,000) (172,000)
Common stock dividend........... (371,000) (371,000)
---------- ---------- ---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 1996......... 7,431,769 $ 7,432,000 $76,068,000 $(1,466,000) $ (5,178,000) $76,856,000
========== ========== ========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
- 35 -
</TABLE>
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
1996 1995 1994
- ----------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..........................$ 7,758,000 $ 8,200,000 $ 4,235,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of deferred insurance
acquisition costs................ 3,819,000 3,898,000 5,573,000
Realized losses on sales
of investment securities........ 30,000 44,000 1,787,000
Unrealized losses (gains) on
trading securities............... (220,000) (44,000) 134,000
Equity loss (income).............. 33,000 527,000 (437,000)
Depreciation...................... 335,000 286,000 276,000
Deferred tax benefits............. (260,000) (1,586,000) (837,000)
Income tax benefit credited
to paid-in capital............... - 599,000 363,000
Income from discontinued
operations, net.................. (1,048,000) (2,028,000) (1,839,000)
Other............................. 6,000 185,000 336,000
Change in assets and liabilities:
Net sales of trading securities... 905,000 188,000 1,643,000
Increase (decrease) in future
insurance policy benefits, claims
and other policy liabilities..... 48,236,000 11,435,000 (3,301,000)
Additions to deferred insurance
acquisition costs................ (5,884,000) (2,075,000) (2,618,000)
Change in net amounts due from
and to reinsurers................ (3,471,000) (5,531,000) 4,350,000
Change in income tax liability.... (176,000) (507,000) 1,043,000
Other............................. 593,000 (737,000) 614,000
---------- ---------- ----------
Net cash provided by operating
activities....................$50,656,000 $12,854,000 $11,322,000
---------- ---------- ----------
(CONTINUED)
- 36 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
1996 1995 1994
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and
to brokers......................$ (691,000) $ (980,000) $ 6,167,000
Sales and maturities of short-term
investments..................... 31,542,000 15,933,000 3,859,000
Purchases of short-term
investments..................... (34,479,000) (22,609,000) (1,779,000)
Net sales (purchases) of resale
and repurchase agreements....... (31,348,000) 13,465,000 3,027,000
Sales of equity securities....... 23,313,000 83,611,000 57,721,000
Purchases of equity securities... (20,723,000) (80,668,000) (50,902,000)
Sales and maturities of fixed
maturities...................... 187,206,000 238,304,000 141,213,000
Purchases of fixed maturities....(215,254,000) (243,118,000) (161,859,000)
Proceeds on sales of other
investments..................... 8,488,000 5,539,000 2,930,000
Additional investments in
other investments,
net of distributions............ (15,786,000) (7,217,000) (2,388,000)
Discontinued operations, net..... 18,470,000 984,000 78,000
Other............................ (1,339,000) (1,156,000) (1,042,000)
---------- ---------- ----------
Net cash (used) provided by
investing activities........ (50,601,000) 2,088,000 (2,975,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and
warrants........................ (5,000) (2,251,000) (1,009,000)
Payments of investment-type
insurance contracts............. (4,190,000) (4,190,000) (4,802,000)
Repayment of long-term debt...... (12,061,000) (2,000,000) (1,050,000)
Dividends paid................... (298,000) (311,000) (316,000)
---------- ---------- ----------
Net cash used by
financing activities........ (16,554,000) (8,752,000) (7,177,000)
---------- ---------- ----------
Increase (decrease) in cash
and cash equivalents............ (16,499,000) 6,190,000 1,170,000
Cash and cash equivalents,
beginning of year............... 26,860,000 20,670,000 19,500,000
---------- ---------- ----------
Cash and cash equivalents,
end of year.....................$ 10,361,000 $ 26,860,000 $ 20,670,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
- 37 -
<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 ("IHC") is a financial services
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."
On December 31, 1996, IHC consummated the distribution of the
common stock of its majority-owned sign manufacturing subsidiary,
Zimmerman Sign Company ("Zimmerman"), on a pro rata basis to the
holders of record of IHC's common stock as of December 20, 1996.
Since December 1995, the Consolidated Financial Statements of the
Company have been restated to present Zimmerman as discontinued
operations (see Notes 2 and 10 of Notes to Consolidated Financial
Statements).
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 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 book value.
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) ONE-FOR-TWO REVERSE STOCK SPLIT
A one-for-two reverse stock split (the "reverse stock split")
of IHC's common stock became effective on June 28, 1996;
accordingly, common shares outstanding and per share calculations
have been restated for prior periods.
- 38 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) RECLASSIFICATION
Certain amounts in prior years' consolidated financial
statements and notes thereto have been reclassified to conform to
the 1996 presentation.
(E) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost which approximates fair
value and include principally interest-bearing deposits at
brokers, money market instruments and U.S. Treasury securities
with original maturities 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
fair value.
(F) 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.
(G) INVESTMENTS IN SECURITIES
(i) Investments in fixed income securities (bonds (including
Government National Mortgage Association ("GNMA" bonds)), notes
and redeemable preferred stock), equity securities, and
derivatives (options and options on future contracts) are valued
as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investments in fixed income and equity
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 fair value ("fair value"). 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 fair 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
- 39 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
the fair value of the securities. The Company's risk is an
increase in the fair value of the securities sold in excess of the
consideration received, but that risk is mitigated as a result of
relationships to certain securities owned. Unrealized gains or
losses on open transactions are credited or charged, as
appropriate, to the Consolidated Statement 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, such as put and call option contracts on interest
rate futures contracts, to minimize losses on portions of the
Company's fixed income portfolio in a rapidly changing interest
rate environment and equity index options to offset fluctuations
in the equity markets. The derivative financial instruments are
all readily marketable and are carried on the Consolidated Balance
Sheets at their current fair value with changes in unrealized
gains or losses, net of deferred income taxes, credited or charged
as appropriate directly to stockholders' equity for investments
carried as available-for-sale or to the Consolidated Statement of
Operations for investments carried as trading. All realized gains
and losses are reflected currently in the Consolidated Statement
of Operations.
(v) Fair value is determined by quoted market prices, where
available, or by independent pricing services.
(H) PARTNERSHIP INTERESTS
Partnership interests primarily consist of investments in
partnerships that have relatively "market neutral" arbitrage
strategies, and all securities held by these partnerships are
carried at fair value. All partnership investments are carried on
the equity method.
(I) MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are stated at their aggregate
unpaid balances.
(J) 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
- 40 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
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.
(K) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment included in other assets are
stated at cost of $1,637,000 and $1,204,000 which is net of
accumulated depreciation and amortization of $1,498,000 and
$1,183,000 in 1996 and 1995 respectively. 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.
(L) FUTURE INSURANCE POLICY BENEFITS
Liabilities for future insurance policy benefits, including
future dividends on 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, 1996 and 1995:
1996 1995
-------------------------
(DOLLARS IN THOUSANDS)
Life......................... $ 53,299 $ 53,030
Accident and health.......... 62,295 50,842
------- -------
$115,594 $103,872
======= =======
(M) FUNDS ON DEPOSIT
Funds received for certain long duration contracts
(principally, annuities and universal life policies) are credited
directly to a policyholder liability account-funds on deposit.
- 41 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
Withdrawals are recorded directly as a reduction of respective
policyholders' funds on deposit. Amounts on deposit were credited
at an annual rate of 4.5% to 13.9% in 1996 and 1995.
(N) 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
term of the policy.
(O) PARTICIPATING POLICIES
Participating policies represent 7.0%, 6.6%, and 7.8% of the
individual life insurance in-force and 1.7%, 2.0%, and 2.6% of the
net premium income, as of and for the years ended December 31,
1996, 1995 and 1994, 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, 1996, the
stockholder's equity of the insurance companies was not restricted
because of participating policyholders' surplus.
(P) DEFERRED INCOME TAXES
The provision for deferred income taxes is based on the asset
and liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized by applying enacted
statutory tax rates applicable to future years to temporary
differences related to amounts included in the Consolidated
Statement of Operations arising from differences between amounts
reported in the Consolidated Financial Statements and the tax
bases of existing assets and liabilities. The effect on deferred
income taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
(Q) INCOME PER COMMON SHARE
The computation of income per common share for each of the
three years ended December 31, 1996, 1995 and 1994 is based upon
the weighted average number of common and dilutive common
equivalent shares outstanding of approximately 7,479,000,
7,608,000 and 7,859,000, respectively. Dilutive common equivalent
shares for 1996 and 1995 include 47,000 and 11,000 shares,
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.
- 42 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(R) REINSURANCE
Amounts paid for or recoverable under reinsurance contracts
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.
(S) STOCK BASED COMPENSATION
The Company applies APB opinion No. 25 "Accounting for Stock
Issued to Employees" and related interpretations in accounting for
its stock-based compensation plan. Since stock options under the
plan are issued at fair market value on date of grant, no
compensation cost has been recognized in the Consolidated
Statement of Operations. The Company has also adopted the
disclosure provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation."
(T) 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 the 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 expect it to have a material impact on the Company.
NOTE 2. DISCONTINUED OPERATIONS
On December 31, 1996, IHC consummated the distribution of the
common stock of Zimmerman on a pro rata basis to holders of record
of IHC's common stock as of December 20, 1996.
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman common stock for each five
shares of IHC common stock, and cash in lieu of fractional shares.
IHC received a ruling from the Internal Revenue Service that the
distribution would be tax-free to IHC shareholders, and that IHC
would not recognize income, gain or loss as a result of the
transaction.
- 43 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33,000,000, of which $10,000,000 consists of subordinated debt
guaranteed by a subsidiary of IHC (see also Note 10 of Notes to
Consolidated Financial Statements). The proceeds of borrowings by
Zimmerman under such arrangements were used, among other things,
to repay all of its prior outstanding indebtedness and to pay a
$19,701,000 special cash dividend to its shareholders. From its
$18,470,000 portion of the special dividend, IHC repaid all of its
$10,000,000 of indebtedness, contributed $5,000,000 to Madison
Life in exchange for a surplus note, and used the balance for
working capital. Expenses of $1,106,000 incurred in connection
with the distribution transaction are recorded in discontinued
operations, net on the Consolidated Statement of Operations.
Since Zimmerman has historically comprised all of the
Company's manufacturing segment, the Consolidated Financial
Statements and notes thereto of the Company have been restated,
since December 31, 1995, to present Zimmerman as discontinued
operations.
The net assets of Zimmerman have been reclassified to net
assets of discontinued operations in the 1995 Consolidated Balance
Sheet as follows:
DECEMBER 31,
1995
----------------------
(DOLLARS IN THOUSANDS)
Accounts receivable........... $ 9,284
Inventories................... 12,659
Other assets.................. 3,938
Accounts payable and liabilities
including minority interest.. (8,899)
Long-term debt................ (9,689)
Net assets of discontinued ------
operations................... $ 7,293
======
Income from discontinued operations for the years ended
December 31, 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994
---------------------------
(DOLLARS IN THOUSANDS)
Revenues.................. $41,277 $41,669 $36,415
====== ====== ======
Operating income from
discontinued operations,
net of minority interest. $ 1,709 $ 3,280 $ 2,958
Income taxes.............. 661 1,252 1,119
------ ------ ------
Net income from
discontinued operations.. $ 1,048 $ 2,028 $ 1,839
====== ====== ======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
During 1996, Zimmerman was included in the consolidated
federal income tax return filed by the Company. On a separate
company basis, Zimmerman had a tax sharing agreement with IHC for
the periods presented; 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, 1996, the Company had
approximately $36,542,000 in resale agreements outstanding, all of
which settled on January 2, 1997 and January 6, 1997 and were
subsequently reinvested. The Company maintains control of
securities purchased under resale agreements and values the
collateral on a daily basis and obtains additional collateral, if
necessary, to protect the Company in the event of default by the
counterparties.
NOTE 4. INVESTMENT SECURITIES
The cost, (amortized cost with respect to certain fixed maturities) gross
unrealized gains, gross unrealized losses and fair value of investments in
securities are as follows:
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------------------------------------------
(DOLLARS IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities.....$ 30,204 $ 377 $ (1,311) $ 29,270
U.S. Government and
agencies obligations.... 28,832 180 (747) 28,265
GNMA's................... 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
------- ------- ------- -------
- 45 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1996
------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------------------------------------------
(DOLLARS IN THOUSANDS)
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)
------- ------- ------- -------
Total financial instruments
sold, but not yet
purchased $ (585) $ 46 $ - $ (539)
======= ======= ======= =======
DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
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
GNMA's................... 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
======= ======= ======= =======
- 46 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-----------------------------------------------
(DOLLARS IN THOUSANDS)
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)
======= ======= ======= =======
The amortized cost and fair value of fixed income securities
at December 31, 1996, 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. Excluding
extraordinary paydowns, the average life of GNMA's is materially
less than the stated maturity.
DECEMBER 31, 1996
-----------------------
AMORTIZED FAIR
COST VALUE
-----------------------
(DOLLARS IN THOUSANDS)
Due in one year or less..............$ 387 $ 399
Due after one year through
five years.......................... 7,092 7,046
Due after five years through
ten years........................... 31,984 31,320
Due after ten years.................. 21,191 20,349
------- -------
60,654 59,114
GNMA's - 15 year.................... 61,145 60,573
GNMA's - 30 year.................... 45,556 45,353
------- -------
$167,355 $165,040
======= =======
The average fair value of trading options sold, but not yet
purchased was $97,000 and $21,000 for 1996 and 1995, respectively.
Approximately $4,187,000 of gross gains and $3,862,000 of
gross losses were realized on sales of available-for-sale
securities for the year ended December 31, 1996.
- 47 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
Approximately $7,000 of net losses were realized on options
held for sale, $72,000 of net gains were realized on options held
for trading and $477,000 of net losses were realized on future
contracts for the year ended December 31, 1996.
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 net losses were realized on sales
of options held for sale, $48,000 of net losses were realized on
options held for trading and $1,286,000 of net 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 net gains were realized on sales
of options held for sale, $52,000 of net gains were realized on
options held for trading and $223,000 of net gains were realized
on sales of future contracts held for sale for the year ended
December 31, 1994.
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:
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 funds on deposit. The first type
is credited with a current market interest rate, resulting in a
carrying value which approximates fair value. The second type
- 48 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
(CONTINUED)
carries fixed interest rates which are currently higher than
current market interest rates. The fair value of these deposits
was determined by discounting the 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, 1996 DECEMBER 31, 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------------------- ----------------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Fixed maturities.....$165,040 $165,040 $141,393 $141,393
Equity securities....$ 4,427 $ 4,427 $ 6,490 $ 6,490
Mortgage Loans.......$ 373 $ 431 $ 441 $ 527
Policy Loans.........$ 6,582 $ 6,085 $ 5,154 $ 4,412
FINANCIAL LIABILITIES:
Funds on deposit.....$ 68,915 $ 71,429 $ 34,463 $ 38,231
Financial instruments
sold but not yet
purchased...........$ 539 $ 539 $ 836 $ 836
Long-term borrowings.$ - $ - $ 12,111 $ 12,111
NOTE 6. NET INVESTMENT INCOME
Major categories of net investment income for the years ended
December 31, 1996, 1995 and 1994 are summarized as follows:
1996 1995 1994
----------------------------
(DOLLARS IN THOUSANDS)
INTEREST AND DIVIDENDS:
Fixed income securities...........$11,146 $ 9,347 $ 9,646
Equity securities................. 404 681 967
Short-term investments............ 1,437 1,371 653
Other............................. 1,623 441 674
------ ------ ------
14,610 11,840 11,940
- 49 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 6. NET INVESTMENT INCOME (CONTINUED)
1996 1995 1994
----------------------------
(DOLLARS IN THOUSANDS)
Investment income from
partnerships................... 2,644 2,257 1,189
Investment expenses............. (337) (212) (421)
------ ------ ------
NET INVESTMENT INCOME..........$16,917 $13,885 $12,708
====== ====== ======
NOTE 7. NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized and unrealized gains (losses) on investments for
the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994
----------------------------
(DOLLARS IN THOUSANDS)
Net realized gains (losses)
Fixed maturities............... (411) 1,258 (5,413)
Equity securities.............. 930 1,196 91
Financial instruments sold,
but not yet purchased......... (75) (1,177) 3,310
Other.......................... (474) (1,321) 225
------ ------ ------
Net realized losses............$ (30) $ (44) $(1,787)
Net unrealized gains
(losses)...................... 220 44 (134)
NET REALIZED AND UNREALIZED ------ ------ ------
GAINS (LOSSES).............$ 190 $ - $(1,921)
====== ====== ======
NOTE 8. OTHER INVESTMENTS
Other investments consist of the following at December 31,
1996 and 1995:
DECEMBER 31,
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
Partnership interests................$23,417 $18,889
Policy loans......................... 6,582 5,154
Mortgage loans....................... 373 441
Real estate.......................... 811 929
Other................................ 1,500 -
------ ------
$32,683 $25,413
====== ======
- 50 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 8. OTHER INVESTMENTS (CONTINUED)
Included in partnership interests are the following significant
investments:
A) Dolphin Limited Partnership
The Company had invested $11,442,000 and $4,086,000 at
December 31, 1996 and 1995, respectively, in Dolphin Limited
Partnership ("Dolphin"), a limited partnership which invests in
relatively "market neutral" strategies, such as risk arbitrage,
convertible arbitrage and distressed situations.
The condensed balance sheet of Dolphin is as follows:
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
Investments at market value....................$46,916
Due from brokers............................... 11,233
Other assets................................... 140
------
Total assets.............................$58,289
======
Financial instruments sold, but not
yet purchased.................................$12,769
Due to brokers................................. 7,940
Other liabilities.............................. 151
------
Total liabilities........................ 20,860
------
Partners' capital
IHC........................................... 11,442
Other partners................................ 25,987
------
Partners' capital.............................. 37,429
------
Total liabilities and partners' capital..$58,289
======
The condensed statement of operations for Dolphin is as follows:
YEAR ENDED
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
Net realized and unrealized gains..............$ 5,145
Net investment income.......................... 1,123
------
Total revenues................................ 6,268
Expenses....................................... 1,467
------
Net income.....................................$ 4,801
======
IHC's share of net income......................$ 1,681
======
- 51 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 8. OTHER INVESTMENTS (CONTINUED)
B) Incopoint Limited Partnership
The Company had invested $9,883,000 and $12,161,000 at
December 31, 1996 and 1995, respectively, in Incopoint Limited
Partnership ("Incopoint"), a limited partnership which invests in
relatively "market neutral" strategies, such as equity arbitrage
in the utility sector.
The condensed balance sheet of Incopoint is as follows:
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
Cash and investments at market value...........$42,453
Other assets................................... 3,876
------
Total assets.............................$46,329
======
Financial instruments sold, but not
yet purchased.................................$22,239
Other liabilities.............................. 2,828
------
Total liabilities........................ 25,067
------
Partners' capital
IHC........................................... 9,883
Other partners................................ 11,379
------
Partners' capital.............................. 21,262
------
Total liabilities
and partners' capital....................$46,329
======
The condensed statement of operations for Incopoint is as
follows:
YEAR ENDED
DECEMBER 31, 1996
----------------------
(DOLLARS IN THOUSANDS)
Net realized and unrealized gains..............$ 2,070
Net investment income.......................... 56
------
Total revenues................................ 2,126
Expenses....................................... 142
------
Net income.....................................$ 1,984
======
IHC's share of net income......................$ 922
======
- 52 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
NOTE 9. 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.
The change in the liability for unpaid claims and claim
adjustment expenses for the Insurance Group's health and
disability coverages is as follows:
DECEMBER 31,
1996 1995 1994
--------------------------
(DOLLARS IN THOUSANDS)
Balance at beginning of year..$ 3,403 $ 1,815 $ 2,558
Less: reinsurance
recoverables................. 531 327 719
------ ------ ------
Net balance at beginning
of year...................... 2,872 1,488 1,839
------ ------ ------
Amount incurred:
Current year.................. 26,997 20,234 19,612
Prior years................... 7,003 4,530 3,124
------ ------ ------
Total....................... 34,000 24,764 22,736
------ ------ ------
Amount paid, related to:
Current year.................. 22,077 14,490 14,662
Prior years................... 13,129 8,890 8,425
------ ------ ------
Total....................... 35,206 23,380 23,087
------ ------ ------
Net balance end of year....... 1,666 2,872 1,488
Plus: reinsurance recoverables 512 531 327
------ ------ ------
Balance at end of year........ 2,178 3,403 1,815
Unpaid life claims............ 1,736 1,759 2,619
------ ------ ------
Total insurance policy claims.$ 3,914 $ 5,162 $ 4,434
====== ====== ======
The preceding schedule reflects the due and unpaid, in the
course of settlement and estimated incurred but not reported
components of the unpaid claims reserves for the Insurance Group'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 preceding
schedule which accounts for a significant portion of the incurred
amounts related to prior years. The incurred and paid data above
reflects all activity for the year.
- 53 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 10. LIABILITIES OF BUSINESS TRANSFERRED
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. Such subordinated
debt matures on October 31, 2001. In conjunction with the
guarantee, such subsidiary entered into a $10,000,000 line of
credit on October 31, 1996 which may be drawn on in the event of
a default in repayment by Zimmerman of its subordinated debt. As
to such subsidiary, the line of credit (i) 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, (ii) requires the maintenance of minimum amounts of
net worth, as defined, certain financial ratios, and certain
investment restrictions and (iii) is secured by the stock of
Madison Life and its immediate parent company and contribution
notes of Madison Life aggregating $25,000,000. At December 31,
1996, there were no amounts outstanding under the line of credit.
NOTE 11. LONG-TERM DEBT
Long-term debt at December 31, 1995 was as follows (dollars
in thousands):
Credit agreement at a weighted
average interest rate of 7.69%..............$12,000
Other borrowings at a 7% annual
interest rate............................... 111
------
$12,111
======
Cash payments for interest were approximately $764,000,
$1,241,000, and $687,000, for the years ended December 31, 1996,
1995 and 1994, respectively. All long-term debt was repaid during
1996.
NOTE 12. PREFERRED STOCK
During 1996, IHC reduced the number of authorized shares of
preferred stock, par value $1.00 per share, from 20,000,000 to
100,000.
- 54 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 13. COMMON STOCK
(A) IHC has reserved 2,745,890 shares of common stock for
issuance under its stock option plan and outstanding warrants at
December 31, 1996.
(B) In 1991, IHC initiated a program of repurchasing shares of
its common stock and warrants. From January 1, 1991 through
December 31, 1996, 2,130,722 common shares, or 23% of the amount
outstanding on January 1, 1991, were repurchased at a cost of
$10,939,000. All of such repurchased shares have either been
retired or reissued.
(C) During 1996, IHC reduced the number of authorized shares of
common stock, par value $1.00 per share, from 50,000,000 to
15,000,000.
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
800,000 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 with regard to
employees will vest ratably over a three-year period beginning on
the first anniversary of the date of grant, and with regard to
directors will vest six months from date of grant. At December
31, 1996, options to purchase 441,942 shares were available for
future grants under the plan.
As a result of the reverse stock split, the number of shares
of common stock reserved for issuance, the number of options
outstanding and the exercise price of the outstanding options were
adjusted correspondingly.
The following summarizes information with respect to stock
options granted under the plan for the years ended December 31,
1996, 1995 and 1994:
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
1996 1995 1994
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------- --------
Outstanding,
beginning of year 316,250 $ 6.97 18,500 $ 8.07 16,000 $ 8.34
Granted 22,000 $ 9.17 300,750 $ 6.89 2,500 $ 6.38
Forfeited - - ( 3,000) $ 6.53 - -
------- ------- ------
Outstanding,
end of year 338,250 $ 7.11 316,250 $ 6.97 18,500 $ 8.07
======= ======= ======
Exercisable
at year end 118,750 20,000 16,000
======= ======= ======
The following is a summary of stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable
- -------------------------------------------------- ---------------------
Weighted Weighted Weighted
Range of Average Average Averaged
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ----------- --------- --------- ------------ --------
(In Years)
$ 2.50 - $ 5.75 6,000 5.2 $ 3.66 6,000 $ 3.66
$ 6.31 - $ 7.69 300,250 8.5 $ 6.89 102,750 $ 6.88
$ 9.00 - $ 9.19 22,000 9.3 $ 9.17 - -
$10.25 - $12.50 10,000 1.9 $11.15 10,000 $11.15
------- -------
$ 2.50 - $12.50 338,250 8.3 $ 7.11 118,750 $ 7.08
======= =======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
The Company applies Opinion 25 and related interpretations in
accounting for its stock-based compensation plan. Since stock
options under the Company's plan are issued at fair market value
on date of the grant, no compensation cost has been recognized in
the Consolidated Statement of Operations.
SFAS No. 123, "Accounting for Stock-Based Compensation"
establishes a fair value based method of accounting for stock-
based compensation plans as an alternative to Opinion 25 whereby
the compensation cost is measured at the grant date based on the
value of the award and such cost is recognized over the vesting
period of the options. Had the Company applied SFAS No. 123 in
accounting for stock options, net income and net income per share
would have been as follows:
1996 1995
------------------------ -----------------------
In Thousands Per Share In Thousands Per Share
------------ ---------- ------------ ---------
Net income,
as reported $ 7,758 $ 1.04 $ 8,200 $ 1.08
SFAS No. 123
pro forma
adjustments (287) (.04) (144) (.02)
------- ------- ------- -------
Net income,
pro forma $ 7,471 $ 1.00 $ 8,056 $ 1.06
======= ======= ======= =======
No tax has been provided on the calculation of SFAS No. 123
because a valuation allowance would have been provided for this
temporary difference.
The pro forma adjustments relate to options granted during
1996 and 1995 for which a fair value on the date of the grant was
determined using the Black-Scholes model of theoretical options
pricing, and were based on the following assumptions: (i)
expected volatility is based on the three year period, calculated
weekly, preceding the date of grant; (ii) the risk-free rate of
return is based on the 10 year U.S. Treasury Note yield to
maturity as at the date of grant; (iii) dividend yield assumes
that the current dividend rate paid on the Common Stock continues
unchanged until the expiration date of the options; (iv) an
expected life that coincides with the term of the option; and (v)
a three-year phased-in vesting period that averages two years. No
effect has been given to options granted prior to 1995. The
weighted average fair value of options granted during 1996 and
1995 was $3.48 and $2.68 per share, respectively.
- 57 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
Valuation and related assumption information are presented below:
Weighted averages for options issued during
1996 1995
------------------- -------------------
Valuation assumptions:
Expected life,
in years 10.0 10.0
Expected volatility 12.8% 15.7%
Risk free interest
rate 6.5% 6.6%
Expected annual
dividends per share $ .05 $ .04
(B) SHARE PURCHASE WARRANTS
At December 31, 1996, 1,287,294 share purchase warrants were
outstanding. The warrants are exercisable through June 30, 2001
for a maximum of 1,965,697 shares of common stock at a price of
$16.37 per share (as adjusted for the reverse stock split and the
distribution of Zimmerman).
Since the inception of IHC's repurchase plan through December
31, 1996, 404,491 warrants have been repurchased at a cost of
$131,000. All of such repurchased warrants have been retired.
NOTE 15. INCOME TAXES
The provision for income tax expense (benefit) for the years
ended December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
------------------------------
(DOLLARS IN THOUSANDS)
CURRENT:
U.S. Federal..........$ 132 $ (45) $ (5)
State and Local....... 238 231 119
------ ------ ------
370 186 114
------ ------ ------
DEFERRED:
U.S. Federal.......... (204) (1,415) (795)
State and Local....... (56) (171) (42)
------ ------ ------
(260) (1,586) (837)
------- ------- -------
Income tax expense
(benefit)............$ 110 $(1,400) $ (723)
====== ====== ======
The Federal statutory rate of 34% in 1996, 1995 and 1994 is
reconciled to the Company's effective income tax rate as follows:
- 58 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
1996 1995 1994
-------------------------------
(DOLLARS IN THOUSANDS)
Tax computed at the
the statutory rate...$ 2,319 $ 1,623 $ 569
Dividends received
deduction and tax
exempt interest...... (131) (198) (292)
Special life insurance
statutory deductions. (200) (918) (716)
State income taxes, net
of Federal effect.... 120 (24) 29
Tax loss carryforwards
recognized for
financial reporting
purposes............. (1,922) (1,733) (1,256)
Valuation allowance... (118) (132) 1,279
Other, net............ 42 (18) (336)
------ ------ ------
Income tax expense
(benefit)............$ 110 $(1,400) $ (723)
====== ====== ======
The income tax expense (benefit) for the year ended December
31, 1996 allocated to stockholders' equity for unrealized losses
on investment securities was $(813,000), representing the change
in the deferred tax asset of $492,000 at December 31, 1996 and the
deferred tax liability of $321,000 at December 31, 1995.
Temporary differences between the Consolidated Financial
Statement carrying amounts and tax bases of assets and liabilities
that give rise to the deferred tax assets and liabilities at
December 31, 1996 and 1995 relate to the following:
DECEMBER 31,
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
DEFERRED TAX ASSETS:
Loss carryforwards...........$ 3,514 $ 5,311
Other investments............ 896 511
Unrealized losses on
investment securities....... 742 -
Deferred insurance policy
acquisition costs........... 880 880
Future insurance policy
benefits.................... 1,801 1,476
Other........................ 2,517 3,092
------- -------
Total gross deferred
tax assets.................. 10,350 11,270
- 59 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
DECEMBER 31,
1996 1995
----------------------
(DOLLARS IN THOUSANDS)
Less valuation allowance..... (7,191) (8,552)
------- -------
Net deferred tax assets...... 3,159 2,718
------- -------
DEFERRED TAX LIABILITIES:
Other investments............ 481 285
Unrealized gains on
investment securities....... 84 258
Deferred insurance policy
acquisition costs........... 3,564 3,040
Future insurance policy
benefits.................... - 1,308
Other........................ 1,074 943
------- -------
Total gross deferred
tax liabilities......... 5,203 5,834
------- -------
Net deferred tax
liability...............$ (2,044) $ (3,116)
======= =======
The $1,361,000 decrease in the valuation allowance for the
year ended December 31, 1996 is primarily attributable to net
changes in loss carryforwards and unrealized losses 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 and 1994, the Company recorded
$599,000 and $363,000, 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.
- 60 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
NOTE 15. INCOME TAXES (CONTINUED)
The Company files a consolidated Federal income tax return on
a June 30 fiscal year. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $5,200,000 on a tax
return basis. In addition, IHC had available, on a separate return
basis, acquired net operating loss carryforwards of approximately
$4,900,000 on a tax return basis.
The utilization of acquired net operating loss carryforwards
is limited in any one year to the lesser of (i) the Company's
consolidated taxable income or (ii) IHC's parent only taxable
income computed on a separate return basis.
The net operating losses with their expiration dates are as
follows (dollars in thousands):
CONSOLIDATED SEPARATE
RETURN RETURN
EXPIRATION DATE ------------ --------
1997.......................... - 600
1998.......................... - 2,500
1999.......................... - 1,800
2005.......................... 4,900 -
2008.......................... 300 -
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 $1,211,000, $1,355,000, and $(200,000), in 1996,
1995 and 1994, respectively.
- 61 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
Certain subsidiaries of the Company are obligated under non-
cancelable operating lease agreements for office space. Total
rental expense for the years 1996, 1995 and 1994 for operating
leases was approximately $687,000, $643,000, and $581,000,
respectively.
The approximate minimum annual rental expense for operating
leases that have remaining non-cancelable lease terms in excess of
one year at December 31, 1996 are as follows (dollars in
thousands):
1997..............$ 551
1998.............. 555
1999.............. 550
2000.............. 487
2001.............. 423
Thereafter........ 246
-----
Total $2,812
=====
The Company does not provide any post-retirement benefits to
its employees.
At December 31, 1996, 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 the Company is contingently liable as
guarantor of Zimmerman's $10,000,000 of subordinated debt. At
December 31, 1996, $7,905,000 of the $10,000,000 was recorded as
a liability for business transferred until such time as the
guarantee is eliminated (see Note 10 of Notes to Consolidated
Financial Statements).
Fixed Maturities with a carrying value of $5,340,000 and
$5,548,000 were on deposit with various state insurance
departments at December 31, 1996 and 1995, respectively.
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.
NOTE 17. REINSURANCE
Standard Life and Madison Life reinsure portions of certain
business 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 that the assuming
reinsurers are unable to meet their obligations. In adddition,
- 62 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
NOTE 17. REINSURANCE (CONTINUED)
Standard Life and Madison Life participate in various coinsurance
treaties. The ceding of reinsurance does not discharge the
primary liability of the original insurer to the insured, but it
is the practice of insurers (subject to certain limitations of
state insurance statutes) to account for risks which have been
reinsured with other approved companies, to the extent of the
reinsurance, as though they are not risks for which the original
insurer is liable.
The effect of reinsurance on life insurance in force,
benefits to policyholders and premiums earned is as follows:
ASSUMED CEDED
DIRECT FROM OTHER TO OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------------------------------------------------
(DOLLARS IN THOUSANDS)
LIFE INSURANCE IN-FORCE:
- -----------------------
DECEMBER 31, 1996 $4,563,520 $ 488,762 $2,215,533 $2,836,749 17.2%
DECEMBER 31, 1995 $4,022,104 $ 552,707 $1,988,965 $2,585,846 21.4%
DECEMBER 31, 1994 $3,025,823 $ 634,601 $1,724,955 $1,935,469 32.8%
BENEFITS TO POLICYHOLDERS:
- -------------------------
DECEMBER 31, 1996 $ 95,567 $ 7,867 $ 58,193 $ 45,241 17.4%
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%
PREMIUMS EARNED:
- ---------------
DECEMBER 31, 1996
Life............$ 17,948 $ 2,181 $ 6,974 $ 13,155 16.6%
Health.......... 132,125 10,206 85,901 56,430 18.1%
--------- --------- --------- ---------
$ 150,073 $ 12,387 $ 92,875 $ 69,585 17.8%
========= ========= ========= =========
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%
========= ========= ========= =========
- 63 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------
NOTE 18. SEGMENT REPORTING
The Insurance Group engages principally in the life and
health insurance business. 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, 1996, 1995 and 1994 is as follows:
1996 1995 1994
-----------------------------------
(DOLLARS IN THOUSANDS)
REVENUES:
Insurance..................$ 87,784 $ 69,792 $ 59,930
Corporate.................. 1,560 1,635 1,574
------- ------- -------
$ 89,344 $ 71,427 $ 61,504
======= ======= =======
OPERATING INCOME FROM
CONTINUING OPERATIONS:
Insurance.................$ 10,012 $ 7,797 $ 4,690
Corporate................. 1,560 1,635 1,574
Less:
Corporate general
expenses................ 4,019 3,559 3,623
Corporate interest
expense................. 733 1,101 968
------- ------- -------
$ 6,820 $ 4,772 $ 1,673
======= ======= =======
IDENTIFIABLE ASSETS AT YEAR-END:
Insurance..................$320,169 $266,832 $248,222
Corporate.................. 16,232 12,082 11,897
Discontinued operations.... - 7,293 6,249
------- ------- -------
$336,401 $286,207 $266,368
======= ======= =======
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
Dividends from Madison Life are subject to the prior
notification of the Wisconsin Insurance 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 market 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
- 64 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
(CONTINUED)
Wisconsin Insurance Commissioner within 30 days of its receipt of
notice thereof. No dividends were paid by Madison Life in 1995 or
1996. 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. Dividends from First Standard to its parent,
a subsidiary of Standard Life, are subject to the prior
notification of the Delaware Insurance Commissioner. If such
dividends, together with the fair market value of other dividends
or distributions made within the preceding twelve 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, such dividends may be paid so
long as they have not been disapproved by the Delaware Insurance
Commissioner within 30 days of its receipt of notice thereof.
First Standard declared and paid dividends of $2,129,000 and
$1,780,000 in 1996 and 1995, respectively.
Combined net income of the Insurance Group, as determined in
accordance with statutory accounting practices, was approximately
$4,378,000, $6,926,000, and $7,452,000, for 1996, 1995 and 1994,
respectively. Statutory capital and surplus for the Insurance
Group was approximately $55,682,000 and $48,193,000 at December
31, 1996 and 1995, respectively.
NOTE 20. QUARTERLY DATA (UNAUDITED)
The quarterly results of operations for the years ended
December 31, 1996 and 1995 are summarized below:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
- ----
Total revenues...............$ 21,845 $ 21,887 $ 21,700 $ 23,912
======= ======= ======= =======
Income from continuing
operations..................$ 1,363 $ 1,469 $ 1,956 $ 1,922
Income (loss) from dis-
continued operations, net... 431 596 531 (510)
------- ------- ------- -------
Net income...................$ 1,794 $ 2,065 $ 2,487 $ 1,412
======= ======= ======= =======
- 65 -
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------
NOTE 20. QUARTERLY DATA (UNAUDITED) (CONTINUED)
Per Common Share
- ----------------
Income from continuing
operations..................$ 0.18 $ 0.20 $ 0.26 $ 0.26
Income (loss) from dis-
continued operations, net... 0.06 0.08 0.07 (0.07)
------- ------- ------- -------
Net income...................$ 0.24 $ 0.28 $ 0.33 $ 0.19
======= ======= ======= =======
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..................$ .02 $ .16 $ .21 $ .43
Income from discontinued
operations, net............. .08 .07 .06 .06
------- ------- ------- -------
Net income...................$ .10 $ .23 $ .27 $ .49
======= ======= ======= =======
In the fourth quarter of 1996, loss from discontinued
operations, net includes $1,106,000 of expenses, before tax,
attributable to the distribution of Zimmerman and related
transactions (see Note 2 of Notes to Consolidated Financial
Statements).
- 66 -
<PAGE>
SCHEDULE I
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------ ---------- ---------- ----------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST VALUE (1) BALANCE SHEET (2)
- ------------------ ---------- ---------- ----------------
FIXED MATURITIES:
BONDS:
United States Government
and authorities..........$ 135,533,000 $ 134,191,000 $ 134,191,000
States, municipalities
and political sub-
divisions................ 1,618,000 1,579,000 1,579,000
Public utilities.......... 18,133,000 17,257,000 17,257,000
All other corporate
securities............... 12,071,000 12,013,000 12,013,000
----------- ----------- -----------
TOTAL FIXED
MATURITIES.............. 167,355,000 165,040,000 165,040,000
----------- ----------- -----------
EQUITY SECURITIES:
COMMON STOCKS:
Banks, trusts, and
insurance................ 182,000 210,000 210,000
Industrial, miscellaneous
and other............... 2,364,000 2,672,000 2,672,000
NON-REDEEMABLE PREFERRED
STOCK..................... 1,440,000 1,545,000 1,545,000
----------- ----------- -----------
TOTAL EQUITY SECURITIES... 3,986,000 4,427,000 4,427,000
----------- ----------- -----------
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED:
EQUITY SECURITIES:
COMMON STOCKS:
Industrial,
miscellaneous and
other................... (585,000) (539,000) (539,000)
----------- ----------- -----------
(CONTINUED)
- 67 -
<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....... 36,542,000 - 36,542,000
Partnership interests....... 23,417,000 - 23,417,000
Mortgage loans.............. 373,000 - 373,000
Policy loans................ 6,582,000 - 6,582,000
Real estate................. 811,000 - 811,000
Other....................... 1,500,000 - 1,500,000
Short-term investments (3).. 10,316,000 - 10,316,000
----------- -----------
TOTAL INVESTMENTS........$ 250,297,000 - $ 248,469,000
=========== ===========
NOTES:
- -----
(1) Reflects fair value of fixed income securities and equity
securities at the balance sheet date.
(2) The total amounts of fixed income securities and equity
securities 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 certificates of deposit and
U. S. Treasury Bills with original maturities of 91 days to
1 year.
- 68 -
<PAGE>
SCHEDULE III
INDEPENDENCE HOLDING COMPANY
BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31,
1996 1995
----------- -----------
ASSETS:
Cash and cash equivalents......................$ 451,000 $ 249,000
Securities purchased under agreements to resell 262,000 -
Other investments.............................. 8,929,000 -
Investments in consolidated subsidiaries....... 69,491,000 64,143,000
Amounts due from consolidated subsidiaries..... 5,506,000 4,006,000
Notes and other receivables.................... 8,000 31,000
Other assets................................... 37,000 66,000
Net assets of discontinued operations.......... - 7,293,000
---------- ----------
TOTAL ASSETS..............................$ 84,684,000 $ 75,788,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and other liabilities........$ 5,808,000 $ 3,543,000
Amounts due to consolidated subsidiaries...... 1,648,000 340,000
Dividends payable............................. 372,000 298,000
---------- ----------
TOTAL LIABILITIES.......................... 7,828,000 4,181,000
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock (none issued).................. - -
Common stock, 7,431,769 and 7,432,274 shares
issued and outstanding, respectively, net of
2,188,950 shares in treasury.................. 7,432,000 7,432,000
Paid-in capital................................ 76,068,000 76,245,000
Unrealized gains (losses) on investments, net.. (1,466,000) 495,000
Accumulated deficit............................ (5,178,000) (12,565,000)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................. 76,856,000 71,607,000
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.$ 84,684,000 $ 75,788,000
========== ==========
See notes to Parent Company Only Financial Statements.
- 69 -
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1996 1995 1994
-------------------------------------------
REVENUES:
Net investment income
(loss)....................$ 400,000 $ 18,000 $ (130,000)
Other income............... 497,000 529,000 573,000
---------- ---------- ----------
897,000 547,000 443,000
---------- ---------- ----------
EXPENSES:
General and adminis-
trative expenses.......... 3,075,000 2,778,000 3,201,000
--------- ---------- ----------
Loss before income tax
benefit.................... (2,178,000) (2,231,000) (2,758,000)
Income tax benefit.......... (2,534,000) (1,995,000) (2,211,000)
---------- ---------- ----------
Income (loss) before equity
in net income of subsidiaries
and discontinued operations 356,000 (236,000) (547,000)
Equity in net income of
subsidiaries............... 6,354,000 6,408,000 2,943,000
Income from discontinued
operations, net............ 1,048,000 2,028,000 1,839,000
---------- ---------- ----------
Net income..................$ 7,758,000 $ 8,200,000 $ 4,235,000
========== ========== ==========
See notes to Parent Company Only Financial Statements.
- 70 -
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................$ 7,758,000 $ 8,200,000 $ 4,235,000
Adjustments to reconcile net income
to net cash used by operating
activities:
Equity in net income of
subsidiaries................... (6,354,000) (6,408,000) (2,943,000)
Income from discontinued
operations, net................ (1,048,000) (2,028,000) (1,839,000)
Income tax benefit credited to
paid-in capital................ - 599,000 363,000
Realized losses on sales of
investment securities.......... - - 198,000
---------- --------- ----------
Change in other assets and
liabilities.................... (3,825,000) (3,759,000) (1,801,000)
---------- ---------- ----------
Net cash used by operating
activities.................. (3,469,000) (3,396,000) (1,787,000)
---------- ---------- ----------
CASH FLOWS FROM INVESTING SECURITIES:
Discontinued operations, net...... - (301,000) (741,000)
Decrease in investment in and
advances to consolidated
subsidiaries..................... 4,457,000 5,862,000 3,940,000
Other............................. (483,000) - -
---------- ---------- ----------
Net cash provided by investing
activities....................... 3,974,000 5,561,000 3,199,000
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock
and warrants..................... (5,000) (2,251,000) (1,009,000)
Dividends paid.................... (298,000) (311,000) (316,000)
---------- ---------- ----------
Net cash used by financing
activities..................... (303,000) (2,562,000) (1,325,000)
---------- ---------- ----------
Increase (Decrease) in cash and
cash equivalents................. 202,000 (397,000) 87,000
Cash and cash equivalents,
beginning of year................ 249,000 646,000 559,000
---------- ---------- ----------
Cash and cash equivalents, end of
year.............................$ 451,000 $ 249,000 $ 646,000
========== ========== ==========
See notes to Parent Company Only Financial Statements.
- 71 -
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS
NOTE:
(A) In connection with the distribution of Zimmerman Sign Company, two
subsidiaries of IHC were merged into IHC.
(B) Cash payments for taxes were $955,000, 1,233,000 and 125,000 in 1996,
1995 and 1994, respectively.
(C) Income tax benefits on the Statements of Operations includes a charge in
lieu of Federal income taxes of $599,000 in 1995 and $363,000 in 1994
with a corresponding credit to paid-in capital.
(D) The financial information of Independence Holding Company (Parent Company
Only) should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
- 72 -
<PAGE>
<TABLE>
SCHEDULE V
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUTURE
POLICY NET AMORTIZ-
BENEFITS, INVESTMENT ATION OF
CLAIMS INCOME AND DEFERRED
DEFERRED & OTHER GAINS, INSURANCE OTHER
INSURANCE POLICY- AND OTHER BENEFITS ACQUIS- OPERATING
ACQUISITION HOLDERS' UNEARNED PREMIUM INCOME AND ITION EXPENSES PREMIUMS
COSTS FUNDS PREMIUMS REVENUE (1) CLAIMS COSTS (2) WRITTEN
----------- ------- --------- ------- --------- -------- --------- --------- --------
DECEMBER 31, 1996:
Life and
annuity.....$ 7,082 $126,129 $ 3,874 $ 13,155 $ 11,241 $ 13,113 $ 2,416 $ 5,793 $ 12,879
Health....... 4,139 64,495 7,780 56,430 7,525 36,675 1,403 18,939 56,035
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 11,221 $190,624 $ 11,654 $ 69,585 $ 18,766 $ 49,788 $ 3,819 $ 24,732 $ 68,914
======= ======= ======= ======= ======= ======= ======= ======= =======
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
======= ======= ======= ======= ======= ======= ======= ======= =======
(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.
- 73 -
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
3 (i) 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, 1996, 1995 and 1994.
21 Principal subsidiaries of Independence Holding Company,
as of March 14, 1997.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
99 Financial Statements of significant 50% or less owned person.
*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-Q for
the quarter ended June 30, 1996 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.
- 74 -
<PAGE>
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
1996 1995 1994
-------------------------------------
PRIMARY EARNINGS PER SHARE
INCOME:
Income from continuing
operations........................$ 6,710 $ 6,172 $ 2,396
Income from discontinued
operations, net................... 1,048 2,028 1,839
-------- -------- --------
Net income.........................$ 7,758 $ 8,200 $ 4,235
======== ======== ========
SHARES:
Weighted average common
shares outstanding................ 7,432 7,597 7,859
Shares assumed issued for options.. 47 11 -
-------- -------- --------
Average common and common
equivalents shares outstanding.... 7,479 7,608 7,859
======== ======== ========
INCOME PER SHARE:
Primary income per share from
continuing operations.............$ .90 $ 0.81 $ 0.30
Primary income per share from
discontinued operations........... .14 .27 .24
-------- -------- --------
Primary net income per share.......$ 1.04 $ 1.08 $ 0.54
======== ======== ========
FULLY DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of warrants.......$ 32,182 $ 32,182 $ 32,676
Assumed exercise of options........ 2,405 2,204 133
Repurchase of treasury stock at
average market price of $8.29,
$6.64 and $6.14, respectively..... (12,322) (10,119) (9,650)
Assumed payment of debt
outstanding....................... (8,888) (13,311) (14,730)
-------- --------- ---------
Assumed balance to be invested.....$ 13,377 $ 10,956 $ 8,429
======== ========= =========
INCOME:
Net income from continuing
operations........................$ 6,710 $ 6,172 $ 2,396
Pro-forma interest income.......... 1,003 876 674
Pro-forma reduction of
interest expense................. 667 1,065 1,031
-------- --------- ---------
Adjusted net income from
continuing operations............. 8,380 8,113 4,101
Income from discontinued
operations, net................... 1,048 2,028 1,839
-------- --------- ---------
Adjusted net income................$ 9,428 $ 10,141 $ 5,940
======== ========= =========
SHARES:
Weighted average shares
outstanding....................... 7,432 7,597 7,859
Shares assumed issued for warrants. 1,966 1,817 1,844
Shares assumed issued for options.. 338 316 18
Treasury stock assumed purchased... (1,486) (1,519) (1,571)
-------- --------- ---------
Adjusted average shares
outstanding....................... 8,250 8,211 8,150
======== ========= =========
INCOME PER SHARE:
Fully diluted income per share
from continuing operations........$ 1.01 $ 0.99 $ 0.50
Fully diluted income per share
from discontinued operations...... .13 .25 .23
-------- --------- --------
Fully diluted net income per share $ 1.14 $ 1.24 $ 0.73
======== ========= ========
(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 March 14, 1997
------------------------------------
Subsidiary Jurisdiction
- ---------- ------------
Independence Capital Corp. 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
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
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 24, 1997,
relating to the consolidated balance sheets of Independence
Holding Company and subsidiaries as of December 31, 1996 and 1995
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, 1996, which report appears in
the 1996 annual report on Form 10-K of Independence Holding
Company and subsidiaries.
KPMG PEAT MARWICK LLP
New York, New York
March 26, 1997
<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, 1996 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000701869
<NAME> INDEPENDENCE HOLDING COMPANY
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 165,040,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 4,427,000
<MORTGAGE> 373,000
<REAL-ESTATE> 811,000
<TOTAL-INVEST> 248,469,000
<CASH> 10,361,000
<RECOVER-REINSURE> 50,877,000
<DEFERRED-ACQUISITION> 11,221,000
<TOTAL-ASSETS> 336,401,000
<POLICY-LOSSES> 119,508,000
<UNEARNED-PREMIUMS> 11,654,000
<POLICY-OTHER> 68,915,000
<POLICY-HOLDER-FUNDS> 2,201,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,432,000
<OTHER-SE> 69,424,000
<TOTAL-LIABILITY-AND-EQUITY> 336,401,000
69,585,000
<INVESTMENT-INCOME> 16,917,000
<INVESTMENT-GAINS> (30,000)
<OTHER-INCOME> 2,685,000
<BENEFITS> 49,788,000
<UNDERWRITING-AMORTIZATION> 3,819,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 6,820,000
<INCOME-TAX> 110,000
<INCOME-CONTINUING> 6,710,000
<DISCONTINUED> 1,048,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,758,000
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
FINANCIAL STATEMENTS
DECEMBER 31, 1996
(With Independent Auditors' Report Thereon)<PAGE>
<PAGE>
Independent Auditors' Report
----------------------------
To the Partners of Dolphin Limited Partnership:
We have audited the accompanying statement of assets and
liabilities of Dolphin Limited Partnership (a Delaware Limited
Partnership), including the schedule of investments, as of
December 31, 1996, and the related statements of operations,
changes in partners' capital, and cash flows for the year then
ended. These financial statements are the responsibility of the
general partner. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Dolphin Limited Partnership as of December 31, 1996, the results
of its operations, its cash flows and the changes in partners'
capital for the year then ended in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
March 20, 1997
- 2 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
Assets:
Investments in securities, at fair value
(cost $45,834,788) (Note 2)........................$ 46,916,379
Due from brokers (Note 3)........................... 11,233,410
Interest and dividends receivable................... 56,063
Other assets........................................ 27,079
Organizational costs, net of accumulated
amortization of $9,167............................. 55,833
-----------
Total assets..................................$ 58,288,764
===========
Liabilities:
Securities sold, not yet purchased,
at fair value (proceeds $12,186,594) (Note 2)......$ 12,769,117
Due to brokers (Note 3)............................. 7,940,100
Interest and dividends payable...................... 64,854
Due to management company........................... 29,731
Accrued expense..................................... 55,697
-----------
Total liabilities.............................. 20,859,499
-----------
Partners' Capital:
General partner's capital.......................... 982,547
Limited partners' capital.......................... 36,446,718
-----------
Total partners' capital....................... 37,429,265
-----------
Total liabilities and partners' capital.......$ 58,288,764
===========
- ---------------------------------------------------------------------
See accompanying notes to financial statements.
- 3 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Income:
Interest...........................................$ 403,385
Dividends.......................................... 507,809
Net realized gains (Note 5)........................ 5,280,370
Net change in unrealized losses.................... (135,733)
Commission rebates (Note 4)........................ 212,600
----------
Total income.................................. 6,268,431
----------
Expenses:
Interest........................................... 125,990
Dividends.......................................... 124,916
Management fees (Note 1)........................... 326,788
Reimbursable management company investment and
other expenses (Note 4)........................... 212,600
Professional fees and other expenses............... 59,907
Amortization of organizational costs............... 9,167
----------
Total expenses................................ 859,368
----------
Net income..........................................$ 5,409,063
==========
- ----------------------------------------------------------------------
See accompanying notes to financial statements.
- 4 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996
TOTAL
GENERAL LIMITED PARTNERS'
PARTNER PARTNERS CAPITAL
-------- ----------- -----------
Balance, December 31, 1995..$107,938 $10,745,664 $10,853,602
Capital contributions....... 212,265 20,954,335 21,166,600
Allocation of net income:
Pro-rata................... 54,082 5,354,981 5,409,063
Incentive allocation....... 608,262 (608,262) -
------- ---------- ----------
Balance, December 31, 1996..$982,547 $36,446,718 $37,429,265
======= ========== ==========
- --------------------------------------------------------------------
See accompanying notes to financial statements.
- 5 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
Cash flows from operating activities:
Net income........................................$ 5,409,063
Adjustments to reconcile net income to net cash
used in operating activities:
Net change in unrealized losses................... 135,733
Amortization of organization costs................ 9,167
Changes in operating assets and liabilities:
Securities owned................................ (26,962,682)
Due from broker................................. (2,423,838)
Interest and dividends receivable............... (27,781)
Other assets.................................... (27,079)
Organizational costs............................ (65,000)
Securities sold, not yet purchased.............. 1,487,393
Due to broker................................... 1,178,740
Dividend payable................................ 27,955
Accrued expenses................................ 61,998
Due to management company....................... 29,731
-----------
Net cash used in operating activities......... (21,166,600)
-----------
Cash flows from financing activities:
Contributions received............................ 21,166,600
-----------
Net change in cash................................. -0-
Cash at beginning of year.......................... -0-
-----------
Cash at year end...................................$ -0-
===========
- ---------------------------------------------------------------------
See accompanying notes to financial statements.
- 6 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
Notes to Financial Statements
December 31, 1996
- -----------------------------------------------------------------------
Note 1. ORGANIZATION
Dolphin Limited Partnership ("the Partnership") was
formed as a Delaware limited partnership on June 16, 1994 and
was initially capitalized on December 16, 1994. The purpose
of the Partnership is to realize total appreciation
principally by investing in relatively "market neutral"
strategies such as risk arbitrage (an investment approach
designed to profit from the successful completion of proposed
mergers, takeovers, tender offers, leveraged buyouts,
recapitalizations and spin-offs), convertible arbitrage (a
strategy principally designed to capitalize on discrepancies
in the pricing of convertible securities and their underlying
common stock or stock equivalent) and, distressed credit
reorganizations, bankruptcies and liquidations.
Partnership income is allocated to the partners
proportionately with their respective capital accounts at
the time of each such allocation.
The partners entered into an Amended and Restated
Agreement of Dolphin Limited Partnership as of April 1, 1996
(the "Agreement"). The Agreement provides for, among other
things, (i) the payment of a quarterly fee of 0.3125% (1.25%
on an annualized basis) of each limited partner's beginning
capital account for the quarter to Dolphin Management Company
L.L.C. ("Management Company"), a Delaware limited liability
company, for administrative expenses of the Partnership borne
by the Management Company and for certain management services
provided to the Partnership by the Management Company; (ii)
an incentive allocation to the general partner which would
equal 20% of the excess of the net capital appreciation
allocated to a limited partner's capital account for such
year over a specified hurdle rate, as defined, and (iii) a
change in the dissolution date of the Partnership from
December 31, 2010 to December 31, 2007. The original
partnership agreement does not provide for the payment of
fees for management services or an incentive allocation.
In March 1996, Dolphin Associates L.L.C., a Delaware
limited liability company, became the general partner as the
successor by merger to the former general partner, Dolphin
Associates, Inc. As of December 31, 1996, the general partner
and the Management Company were both indirect, wholly-owned
subsidiaries of Geneve Corporation. As of January 1, 1997,
the general partner and management company were purchased by
the management of the general partner.
- 7 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
Notes to Financial Statements
- ----------------------------------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation
The financial statements were prepared on the basis of
generally accepted accounting principles.
The preparation of financial statements in conformity
with generally accepted accounting principles requires the
general partner to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual
results could differ from those estimates.
Net investment income of the Partnership for the period
ending December 31, 1996 was $264,426.
B. Investments
Investments in securities owned (primarily equities,
equity options and other derivative financial instruments)
and securities sold, not yet purchased are recorded on a
trade date basis and are carried at fair value in the
statement of assets and liabilities. Fair value is generally
determined as follows: securities traded on a securities
exchange are valued at the last reported sales price on the
largest securities exchange that such security traded on the
day of valuation; other securities traded in the over-the-
counter market or listed securities for which no sale was
reported on that date are valued at the last quoted bid price
for securities owned or the last quoted asked price for
securities sold, not yet purchased unless included in the
NASDAQ National Market System, in which case they are valued
based upon their last sales prices (if such prices are
available); provided, that, if the last sales price of a
security does not fall between the last bid and asked price
on such date, then the security is valued at the mean between
the last bid and asked price. Securities for which no such
market prices are available are valued as the general partner
may reasonably determine.
Unrealized gains or losses from changes in the fair
value of open transactions are credited or charged, as
appropriate, directly to operations. Realized gains or losses
from closed transactions (including the expiration of
unexercised options) are determined on the basis of specific
- 8 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
Notes to Financial Statements
- ------------------------------------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
B. Investments
identification and are reflected in the statement of
operations.
Other derivative financial instruments, primarily
readily marketable currency forward contracts, are used to
hedge the currency exposure underlying securities traded in
foreign markets. Significant changes in the fair value of
open contracts may require adjustments to applicable margin
requirements.
Securities sold, not yet purchased, represent
obligations to replace borrowed securities that were sold and
include premiums received from options sold or written. The
Partnership's risk with respect to borrowed securities is an
increase in the fair value in excess of the consideration
received, but that risk may be mitigated as a result of
relationships to certain securities owned. While the
transaction is open, the Partnership will incur an expense
for any accrued dividends or interest payable to the lender
of the securities.
A condensed schedule of investments in securities owned
and securities sold, not yet purchased, showing separately
each investment greater than 5.0% of net assets.
C. Interest and Dividends
Dividend income (expense) is recognized on the ex-
dividend date and interest income (expense) is recognized on
an accrual basis.
D. Income Taxes
No provision for federal, state or local income taxes
has been made because the Partnership qualifies for the tax
treatment applicable to partnerships whereby all income will
be allocated to the individual partners for inclusion in
their respective tax returns.
E. Organization Costs
Organization costs are being amortized on a straight-
line basis over 60 months.
- 9 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
Notes to Financial Statements
- -----------------------------------------------------------------------
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
F. Statement of Cash Flows
The Partnership considers all investments to be
operating assets for statement of cash flow purposes.
Note 3. Due from and Due to Brokers
The amount due from brokers primarily represents
receivables for funds held by securities brokers which result
from proceeds of short sales, amounts transferred to the
brokers to serve as deposits, amounts which have not yet been
invested and proceeds from realized securities transactions.
These funds are essentially restricted to the extent that
they serve as collateral against short sales. It is the
Partnership's policy to continuously monitor the credit
standing of the brokers with whom it conducts business.
The amount due to brokers represents obligations for
unsettled trades and margin borrowings which are
collateralized by the Partnership's marketable securities,
whose market values substantially exceed the amount borrowed.
Note 4. Commission Rebates from Brokers; Related Parties
Transactions
In accordance with the Agreement, to the extent the
Partnership received rebates from brokers based on
commissions generated, the Partnership used such amounts to
reimburse the Management Company for expenses such as
quotation equipment and services, news and information
services, compensation of research analysts and certain other
expenses incurred by the Management Company on behalf of the
Partnership.
Note 5. Net Realized Gains on Investments
The components of net realized gains on investments for
the year ended December 31, 1996 are summarized as follows:
Common stocks..................................$ 4,160,179
Equity options................................. 849,901
Preferred stocks............................... 183,903
Forward contracts.............................. 86,677
----------
$ 5,280,370
==========
- 10 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
- ------------------------------------------------------------------------
Market
Position Value
--------- ----------
Convertible Preferred Stocks: (6.28%)
Arcadian Partners 9.5% 96,500 $ 2,352,188
Common Stock - Long: (119.00%)
United States: (117.19%)
Financial Services: (22.44%)
Boatmen's Bancshares 35,000 2,257,500
Standard Federal Bancorp 45,000 2,559,375
Other 3,581,238
Communications & Technology: (16.40%)
MCI Communications 50,000 1,690,625
Other 4,446,483
Drug & Hospital Supplies: (20.37%)
Eckerd Corp. 60,058 1,921,856
Other 5,702,288
Transportation: (17.11%)
Conrail 41,712 4,155,558
Flight Safety International 45,000 2,250,000
Consumer Goods: (18.69%)
Duracell International 30,000 2,108,580
Other 4,887,376
Manufacturing: (8.78%) 3,288,100
Utilities: (3.55%) 1,328,658
Retail Stores: (9.85%)
Vonsco Inc. 40,000 2,395,000
Other $ 1,291,875
(Continued)
- -------------------------------------------------------------------------
See accompanying notes to financial statements.
- 11 -
<PAGE>
DOLPHIN LIMITED PARTNERSHIP
(A Delaware Limited Partnership)
SCHEDULE OF INVESTMENTS
(Continued)
DECEMBER 31, 1996
- -----------------------------------------------------------------------
Market
Position Value
--------- -----------
Canada: (1.81%)
Pacific Forest Products 51,500 $ 676,710
Options - Long: (.06%) 22,969
Common Stock - Short: (-30.10%)
Financial Services: (-.01%) (3,657)
Communications & Technology: (-6.67%)
British Telecomm PLC (270,000) (1,804,518)
Other (1,441,614)
Drug & Hospital Supplies: (-5.88%) (2,005,987)
Consumer Goods: (-9.84%)
Gillette Company (27,120) (2,108,580)
Other (1,250,188)
Manufacturing: (-.73%) (272,500)
Utilities: (-1.38%) (516,188)
Retail Stores: (-4.98%) (1,863,075)
Options - Short: (-4.01%) (1,502,810)
----------
Total $34,147,262
==========
- -----------------------------------------------------------------------
See accompanying notes to financial statements.
- 12 -
