FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: JUNE 30, 1998
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Commission File Number: 0-10306
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INDEPENDENCE HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 58-1407235
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(State of Incorporation) (I.R.S. Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)358-8000
NOT APPLICABLE
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Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2)has been
subject to such filing requirements for the past 90 days. Yes X. No .
7,435,569 SHARES OF COMMON STOCK, $1.00 PAR VALUE
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Common stock outstanding as of August 10, 1998
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
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Consolidated Balance Sheets -
June 30, 1998(unaudited)and December 31, 1997.... 3
Consolidated Statements of Operations -
Three Months and Six Months ended June 30, 1998
and 1997(unaudited)............................. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998
and 1997(unaudited)............................. 5
Notes to Consolidated Financial Statements
(unaudited)...................................... 6 - 10
Management's Discussion and Analysis of Results
of Operations and Financial Condition........... 11 - 19
PART II - OTHER INFORMATION
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Item 4 - Submission of Matters to a Vote
of Security Holders............................. 20
Item 6 - Exhibits and Reports on Form 8-K........ 20
Signatures....................................... 21
2
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31,
1998 1997
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ASSETS: (UNAUDITED)
Cash and cash equivalents..................$ 3,514,000 $ 23,028,000
Investments:
Short-term investments.................... 13,335,000 18,265,000
Securities purchased under
agreements to resell..................... 5,884,000 25,469,000
Fixed maturities.......................... 208,623,000 201,324,000
Equity securities......................... 23,296,000 13,496,000
Other investments(Note 3)................. 78,942,000 50,459,000
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Total investments...................... 330,080,000 309,013,000
Deferred policy acquisition costs.......... 20,779,000 13,611,000
Due and unpaid premiums.................... 10,327,000 6,448,000
Due from reinsurers........................ 110,730,000 92,990,000
Due from brokers........................... 7,458,000 -
Notes and other receivables................ 3,853,000 3,292,000
Other assets............................... 8,993,000 6,356,000
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TOTAL ASSETS...........................$495,734,000 $454,738,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities..................$225,740,000 $169,082,000
Unearned premiums.......................... 24,600,000 27,893,000
Funds on deposit........................... 67,015,000 72,187,000
Insurance policy claims.................... 6,655,000 6,279,000
Other policyholders' funds................. 3,495,000 2,651,000
Financial instruments sold, but
not yet purchased......................... 221,000 -
Due to brokers............................. 18,025,000 43,356,000
Due to reinsurers.......................... 12,393,000 4,349,000
Accounts payable, accruals and
other liabilities......................... 25,945,000 23,516,000
Liability for business transferred (Note 2) 7,905,000 7,905,000
Income taxes............................... 6,435,000 6,515,000
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TOTAL LIABILITIES...................... 398,429,000 363,733,000
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STOCKHOLDERS' EQUITY:
Preferred stock (none issued).............. - -
Common stock, 7,435,569 and 7,430,169
shares issued and outstanding, net
of 2,188,950 shares in treasury........... 7,436,000 7,430,000
Paid-in capital............................ 76,094,000 76,046,000
Accumulated other comprehensive income:
Unrealized gains on investments,
net of taxes (Notes 5 and 6)............. 2,700,000 1,892,000
Retained earnings ......................... 11,075,000 5,637,000
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TOTAL STOCKHOLDERS' EQUITY............. 97,305,000 91,005,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..................$495,734,000 $454,738,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
3
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
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REVENUES:
Premiums earned.......$ 19,839,000 $ 20,073,000 $ 40,898,000 $ 38,822,000
Net investment income. 6,331,000 5,535,000 12,252,000 9,717,000
Net realized and
unrealized gains
(losses)............. 200,000 (294,000) 413,000 (151,000)
Equity income (loss).. 30,000 2,000 (37,000) 79,000
Other income (loss)... 1,827,000 (389,000) 2,979,000 864,000
----------- ----------- ----------- -----------
28,227,000 24,927,000 56,505,000 49,331,000
----------- ----------- ----------- -----------
EXPENSES:
Insurance benefits,
claims and reserves.. 14,760,000 12,998,000 31,147,000 27,062,000
Amortization of
deferred policy
acquisition costs.... 1,284,000 743,000 2,476,000 1,454,000
Selling, general and
administrative
expenses............. 8,328,000 7,841,000 15,933,000 14,908,000
----------- ----------- ----------- -----------
24,372,000 21,582,000 49,556,000 43,424,000
----------- ----------- ----------- -----------
Operating income
before income taxes.. 3,855,000 3,345,000 6,949,000 5,907,000
Income tax expense
(Note 5)............. 908,000 154,000 1,511,000 456,000
----------- ----------- ----------- -----------
NET INCOME.............$ 2,947,000 $ 3,191,000 $ 5,438,000 $ 5,451,000
=========== =========== =========== ===========
BASIC INCOME PER
COMMON SHARE..........$ .40 $ .43 $ .73 $ .73
=========== =========== =========== ===========
WEIGHTED AVERAGE
BASIC COMMON SHARES
OUTSTANDING........... 7,435,000 7,432,000 7,433,000 7,432,000
=========== =========== =========== ===========
DILUTED INCOME
PER COMMON SHARE......$ .39 $ .43 $ .72 $ .73
=========== =========== =========== ===========
WEIGHTED AVERAGE
DILUTED COMMON SHARES
OUTSTANDING........... 7,576,000 7,497,000 7,565,000 7,486,000
=========== =========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements.
4
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...............................$ 5,438,000 $ 5,451,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred policy
acquisition costs...................... 2,476,000 1,454,000
Realized (gains) losses on sales of
investments............................ (334,000) 59,000
Unrealized (gains) losses on trading
securities............................. (79,000) 92,000
Equity loss (income).................... 37,000 (79,000)
Depreciation............................ 241,000 198,000
Deferred tax expense.................... 528,000 248,000
Other................................... (50,000) (961,000)
Changes in assets and liabilities:
Net purchases of trading securities..... (277,000) (1,947,000)
Increase in future policy liabilities,
claims and other policy liabilities.... 50,279,000 15,579,000
Additions to deferred policy
acquisition costs...................... (9,644,000) (1,467,000)
Change in net amounts due from and to
reinsurers............................. (9,696,000) (10,391,000)
Change in income tax liability.......... (1,023,000) (249,000)
Change in due and unpaid premiums....... (3,879,000) (1,790,000)
Other................................... (62,000) (1,725,000)
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Net cash provided by operating
activities......................... 33,955,000 4,472,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers................................. (32,789,000) (10,256,000)
Sales and maturities of short-term
investments............................. 49,046,000 22,226,000
Purchases of short-term investments...... (44,067,000) (25,250,000)
Net sales of resale agreements........... 19,586,000 19,519,000
Sales and maturities of fixed maturities. 62,813,000 57,584,000
Purchases of fixed maturities............ (69,389,000) (62,213,000)
Sales of equity securities............... 15,046,000 15,348,000
Purchases of equity securities........... (23,375,000) (19,874,000)
Proceeds on sales of other investments... 6,205,000 2,559,000
Additional investments in other
investments, net of distributions....... (34,726,000) (6,100,000)
Other.................................... (633,000) (818,000)
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Net cash used by investing
activities......................... (52,283,000) (7,275,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options......... 55,000 -
Repurchase of common stock............... (1,000) -
Payments of investment-type insurance
contracts............................... (868,000) (947,000)
Dividends paid........................... (372,000) (372,000)
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Net cash used by financing
activities........................ (1,186,000) (1,319,000)
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Decrease in cash and cash equivalents.... (19,514,000) (4,122,000)
Cash and cash equivalents, beginning
of year................................. 23,028,000 10,361,000
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Cash and cash equivalents, end of period.$ 3,514,000 $ 6,239,000
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See Accompanying Notes to Consolidated Financial Statements.
5
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company
engaged principally in the life and health insurance business
through its wholly-owned subsidiaries, Standard Security Life
Insurance Company of New York ("Standard Life"), Madison National
Life Insurance Company, Inc. ("Madison Life") and First Standard
Security Insurance Company ("First Standard") and their
subsidiaries (collectively, the "Insurance Group"). IHC and its
subsidiaries (including the Insurance Group) are collectively
referred to as the "Company".
Geneve Corporation, a diversified financial holding company,
and its affiliated entities 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 the requirements for quarterly reports on Form 10-
Q. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) that are necessary for a fair
presentation of the consolidated results of operations for the
interim periods have been included. The consolidated results of
operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results to be
anticipated for the entire year. The consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in IHC's Annual
Report on Form 10-K for the year ended December 31, 1997. Certain
amounts in the prior year's consolidated financial statements and
notes thereto have been restated to conform to the 1998
presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect:(i) the reported
amounts of assets and liabilities;(ii) the disclosure of
contingent assets and liabilities at the date of the financial
statements; and (iii) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
6
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 2. DISCONTINUED OPERATIONS
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman Sign Company ("Zimmerman") on a pro
rata basis to holders of record of IHC's common stock as of
December 20, 1996. In connection with the distribution of
Zimmerman, a subsidiary of the Company has guaranteed $10,000,000
of subordinated debt of Zimmerman (the "Guarantee"). At the time
of distribution of Zimmerman's common stock, IHC's management
determined that, due to the financial strength of Zimmerman, the
probability of a payment under the Guarantee was remote. In its
first full year as a public corporation, Zimmerman had net income
of $.51 per share, diluted; and in the first quarter of 1998,
Zimmerman had net income of $.10 per share, diluted. In addition,
since the date of the spin-off from IHC, Zimmerman's debt has
been reduced by $3,100,000 or 10%. Based upon the aforementioned
information, management of IHC believes that the probability of
payment under the Guarantee continues to be remote. IHC maintains
a deferred credit of $7,905,000 or $1.06 per share in connection
with the spin-off of Zimmerman that will be reflected in
stockholders' equity upon termination of the Guarantee.
NOTE 3. OTHER INVESTMENTS
The Company had invested $16,986,000 and $17,373,000 at June
30, 1998 and 1997, respectively, in Dolphin Limited Partnership-A
("Dolphin"), a private limited partnership that invests
principally in relatively "market neutral" strategies which are
less affected by general movements in the equity and fixed income
markets than traditional investments, including "risk/merger
arbitrage" and "convertible arbitrage." "Risk/merger arbitrage"
is an investment approach designed to profit from the successful
completion of proposed mergers, takeovers, tender offers,
leveraged buy-outs, recapitalizations and spin-offs.
"Convertible arbitrage" is a strategy principally designed to
capitalize on discrepancies in the pricing of convertible
securities and their underlying common stocks or stock
equivalents. To a lesser extent, Dolphin also invests in
"distressed situations" which principally means entities which
are in bankruptcy proceedings or are otherwise financially
distressed. The condensed statements of operations for Dolphin
for the three months and six months ended June 30, 1998 and 1997
are as follows:
7
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 3. OTHER INVESTMENTS (CONTINUED)
THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 1998 1997
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(IN THOUSANDS) (IN THOUSANDS)
Revenues........$ 1,099 $ 4,522 $ 3,177 $ 6,242
Net income......$ 599 $ 3,369 $ 2,100 $ 4,560
IHC's share of
net income.....$ 275 $ 1,574 $ 928 $ 2,031
NOTE 4. INCOME PER COMMON SHARE
In December 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share."
SFAS No. 128 establishes standards for computing and presenting
earnings per share. Accordingly, all prior earnings per share
calculations have been restated to reflect the new standard.
Included in the diluted earnings per share calculation for 1998
and 1997, respectively, are 141,000 and 65,000 shares for the
three months ended June 30, 1998 and 1997 and 132,000 and 54,000
shares for the six months ended June 30, 1998 and 1997 from the
assumed exercise of options using the treasury stock method. Net
income does not change as a result of the assumed dilution of
options. Warrants to purchase 1,965,697 shares of common stock at
$16.37 per share were not included in the computation of diluted
income per share because the strike price of the warrants was
greater than the average market price of the common shares during
the three months and six months ended June 30, 1998 and 1997.
NOTE 5. INCOME TAXES
The provision for income taxes shown in the consolidated
statements of operations was computed based on the Company's
estimate of the effective tax rates expected to be applicable for
the current year, including the expected tax impact of the
life/nonlife consolidation. Cash payments for income taxes were
$2,022,000 and $458,000 for the six months ended June 30, 1998
and 1997, respectively.
The income tax expense for the six months ended June 30,
1998 allocated to stockholders' equity for unrealized gains on
investment securities was $414,000 representing the change in
deferred tax liability of $1,458,000 at June 30, 1998 from
$1,044,000 at December 31, 1997.
8
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components. The components of comprehensive income
include net income and certain amounts previously reported
directly in equity.
Disclosures related to comprehensive income for the three
months and six months ended June 30, 1998 and 1997 are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
1998 1997 1998 1997
------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
(A)COMPREHENSIVE INCOME
Net income..............$ 2,947 $ 3,191 $ 5,438 $ 5,451
Unrealized gains
on securities, net
of reclassification.... 624 4,326 808 899
----- ----- ----- -----
Comprehensive
income............$ 3,571 $ 7,517 $ 6,246 $ 6,350
===== ===== ===== =====
(B) RECLASSIFICATION
Unrealized gains, net...$ 508 $ 4,413 $ 887 $ 807
Less: reclassification
for unrealized gains
(losses) included in
net income............. (116) 87 79 (92)
----- ----- ----- -----
Unrealized gains
on securities, net.....$ 624 $ 4,326 $ 808 $ 899
===== ===== ===== =====
(C)ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning balance.......$ 2,076 $(4,892) $ 1,892 $(1,465)
Unrealized gains
on securities, net..... 624 4,326 808 899
----- ----- ----- -----
Ending balance..........$ 2,700 $ (566) $ 2,700 $ (566)
===== ===== ===== =====
9
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." The requirements for SFAS No. 131 are
effective for financial statements for periods ending after
December 15, 1997 but need not be applied to interim financial
statements in the initial year of its application. The Company
is currently evaluating the impact of SFAS No. 131 on the
disclosures required to be made concerning its operating
segments.
In January 1998, the Company adopted the remaining
provisions of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities," as deferred by SFAS No. 127 "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125."
The adoption of the remaining provisions of SFAS No. 125 had no
material impact on the Company.
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance Group)
are collectively referred to as the "Company." All remaining
income, principally income from parent company liquidity (cash,
cash equivalents, resale agreements, marketable securities and
partnership investments), and expense items associated with
parent company activities, the Company's remaining real estate
holdings and certain other investments of the Company, are
included in Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
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The Company's operating income increased $.5 million to $3.9
million for the period ended June 30, 1998 from $3.3 million for
the same period in 1997. Net income was $2.9 million, or $.39 per
share, diluted, for the quarter ended June 30, 1998 compared to
$3.2 million, or $.43 per share, diluted, for the quarter ended
June 30, 1997. The Company had net realized and unrealized gains
of $.2 million in 1998 and losses of $.3 million in 1997.
Included in the 1997 results is a non-recurring gain of $1.0
million or $.14 per share, diluted, from the sale of real estate
carried by IHC at nominal value (there was no tax attributable to
such gain). Excluding net realized and unrealized gains or losses
and the non-recurring gain, the Company had operating income of
$3.7 million in 1998 as compared to $2.6 million in 1997, an
increase of 41.0%, which approximately consists of: acquisitions
at Madison Life, 119%; and all other lines of business, (19%).
Income tax expense increased to $.9 million in 1998 from $.2
million in 1997 (see Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $1.7
million to $3.9 million in 1998 from $2.2 million in 1997.
Operating income includes net realized and unrealized gains of
$.2 million in 1998 compared to losses of $.3 million in 1997.
Decisions to sell securities are based on cash flow needs,
11
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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 and
losses) was $3.7 million in 1998 compared to $2.5 million in
1997, an increase of 50.0%.
Premiums earned decreased $.2 million to $19.8 million in
1998 from $20.1 million in 1997; premiums earned at Madison Life
increased $2.0 million while Standard Life had a $2.2 million
decrease in premiums earned. The increase at Madison Life is
comprised of: a $1.6 million increase in the credit lines of
business primarily due to the acquisitions of two single premium
blocks of business, effective April 1 and October 1, 1997; a $.2
million increase in long-term disability premiums; a $.1 million
increase in group term life premiums; and a $.1 million increase
in other life and health lines of business. The change at
Standard Life is comprised of: a $.5 million decrease in its DBL
line due to a higher lapse rate in 1998; a $1.1 million decrease
in HMO premiums due to a reinsurance adjustment on an assumed
block of business; a $.3 million decrease in the closed blocks of
life, annuity and individual and group accident and health lines
of business; and a $.5 million decrease in point of service
premiums due to the loss of one large case in 1998; such
decreases were offset by a $.2 million increase in stop-loss
premiums.
Total net investment income increased $1.1 million primarily
due to an increase in assets at Madison Life related to
acquisitions, partially offset by the lower return on investments
in the second quarter of 1998. The annualized return on
investments of the Insurance Group in the second quarter of 1998
was 7.5% compared to 8.1% in the second quarter of 1997.
Other income increased $3.2 million. Madison Life had an
increase of $1.1 million due to fee income earned by the managing
general underwriter ("MGU") of which Madison Life acquired a
controlling interest effective December 31, 1997. Other income at
Standard Life increased $2.1 million from an increase in
coinsurance reserves, due to the surrender by a large group of
policyholders in a coinsurance treaty in the second quarter of
1997, for which there was no similar surrender in 1998. Equity
income from partnerships remained constant.
Insurance benefits, claims and reserves increased $1.8
million reflecting an increase of $2.1 million at Madison Life
and a $.3 million decrease at Standard Life. Madison Life's
increase resulted from: a $1.0 million increase in the credit
line of business due to the acquisition of a block of business
and due to new accounts; a $.5 million increase in interest
credited to universal life and annuity products; a $.3 million
12
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increase in long-term disability claims; and a $.3 million
increase in group term life claims. The change at Standard Life
is comprised of: a $.8 million decrease in HMO reserves due to a
reinsurance adjustment on an assumed block of business; a $.8
million decrease in additional DBL claims and reserves due to
improved experience ($.7 million) and lower premium ($.1
million); a $.5 million decrease in stop-loss reserves; and a $.3
million decrease in point of service claims and reserves due to
the loss of one large case in 1998; such increases were offset by
a $2.1 million increase in reserves in the closed blocks of life,
annuity and individual and group accident and health lines of
business due to the surrender by the large group of policyholders
in 1997.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $1.1 million. Madison Life's expenses increased $1.8
million and Standard Life's expenses decreased $.7 million. The
increase at Madison Life is primarily due to increases in
commissions of $.7 million related to the increase in premium
volume and the acquisition of new blocks of business and other
general expenses of $1.1 million related to the MGU acquired on
December 31, 1997. The decrease at Standard Life is primarily due
to a reduction in net commission expense attributable to the
increase in expense allowances received from reinsurers on its
HMO line of business as a result of the increase in premiums.
Corporate
- ---------
Operating income for the quarter ended June 30, 1998 was
flat as compared to income of $1.1 million for the quarter ended
June 30, 1997, a decrease of $1.1 million. Included in the 1997
second quarter is a non-recurring gain of $1.0 million from the
sale of IHC's remaining real estate in Florida. Investment income
decreased $.2 million from 1997 due to lower returns from certain
hedged equity investments in 1998. Selling, general and
administrative expenses decreased $.1 million.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE
30, 1997
- -----------------------------------------------------------------
The Company's operating income increased $1.0 million to
$6.9 million for the period ended June 30, 1998 from $5.9 million
for the same period in 1997. Net income was $5.4 million, or $.72
per share, diluted, for the six months ended June 30, 1998
compared to $5.5 million, or $.73 per share, diluted, for the six
months ended June 30, 1997. The Company had net realized and
unrealized gains of $.4 million in 1998 and losses of $.2 million
in 1997. Excluding net realized and unrealized gains or losses
and the non-recurring real estate gain in 1997, the Company had
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operating income of $6.5 million in 1998 as compared to $5.0
million in 1997, an increase of 30.4%, which approximately
consists of: acquisitions of blocks of business made at Madison
Life, 114%; and all other, (14%). Income tax expense increased to
$1.5 million in 1998 from $.5 million in 1997 (see Capital
Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $1.9
million to $7.0 million in 1998 from $5.1 million in 1997.
Operating income includes net realized and unrealized gains of
$.3 million in 1998 compared to losses of $.2 million in 1997.
Operating income (excluding net realized and unrealized gains or
losses) was $6.7 million in 1998 compared to $5.3 million in
1997, an increase of 26.0%.
Premiums earned increased $2.1 million to $40.9 million in
1998 from $38.8 million in 1997; premiums earned at Madison Life
increased $5.0 million while Standard Life had a $2.9 million
decrease in premiums earned. The increase at Madison Life is
comprised of: a $4.2 million increase in the credit lines of
business primarily due to the acquisitions of two single premium
blocks of business, effective April 1 and October 1, 1997; a $.3
million increase in long-term disability premiums; a $.1 million
increase in group term life premiums; and a $.4 million increase
in the ordinary life and individual accident and health lines of
business. The change at Standard Life is comprised of: a $.3
million decrease in its DBL line; a $.5 million decrease in HMO
premiums due to a reinsurance adjustment on an assumed block of
business; a $.3 million decrease in stop-loss premiums; a $1.0
million decrease in the closed blocks of life, annuity and
individual and group accident and health lines of business due to
the continued runoff of this line of business; and a $.8 million
decrease in point of service premiums due to the loss of one
large case in 1998.
Total net investment income increased $2.5 million primarily
due to an increase in assets at Madison Life related to
acquisitions. The annualized return on investments of the
Insurance Group in the first six months of 1998 was 7.6% compared
to 7.4% in the first six months of 1997.
Other income increased $3.1 million. Madison Life's income
increased $1.2 million primarily from fee income earned by the
MGU acquired on December 31, 1997. Other income at Standard Life
increased $1.9 million due to an increase in coinsurance reserves
of $2.3 million, from the surrender by a large group of
policyholders in a coinsurance treaty in the second quarter of
1997, for which there was no similar surrender in 1998; such
14
<PAGE>
increase was offset by a $.4 million decrease due to a reduction
in fee income from the third party administrator in which
Standard Life sold its interest in December 1997. Equity income
from partnerships decreased $.1 million from 1997 to 1998.
Insurance benefits, claims and reserves increased $4.1
million, reflecting an increase of $4.6 million at Madison Life
and a $.5 million decrease at Standard Life. Madison Life's
increase resulted from: a $2.5 million increase in the credit
line of business and a $.7 million increase in interest credited
to universal life and annuity products due to the acquisition of
blocks of business and due to new accounts; a $.6 million
increase in ordinary life and individual A & H reserves and
claims due to surrenders on the new blocks of business; a $.4
million increase in group term life claims; and a $.4 million
increase in claims and reserves in other life and health lines of
business. The change at Standard Life is comprised of: a $.3
million decrease in HMO reinsurance reserves due to a reinsurance
adjustment on an assumed block of business; and a $.8 million
decrease in DBL claims and reserves due to improved experience
($.6 million) and decreased volume ($.2 million); a $.5 million
decrease in stop-loss; such decreases were offset by: a $1.1
million increase in reserves in the closed blocks of life,
annuity and individual and group accident and health lines of
business reserves due to the surrender by the large group of
policyholders in 1997.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $2.1 million. Madison Life's expenses increased $3.3
million and Standard Life's expenses decreased $1.2 million. The
increase at Madison Life is primarily due to increases in
commissions of $1.7 million and other general expenses of $.5
million related to the increase in premium volume and the
acquisition of new blocks of business. In addition, Madison Life
had $1.1 million in general expenses from the MGU acquired on
December 31, 1997. The decrease at Standard Life is primarily due
to a reduction in net commission expense of $1.2 million
attributable to the increase in expense allowances received from
reinsurers on its HMO line of business as a result of the
increase in premiums.
Corporate
- ---------
Operating loss for the six months ended June 30, 1998 was
$.1 million as compared to income of $.8 million for the six
months ended June 30, 1997, a decrease of $.9 million. Included
in the six months ended June 30, 1997 is a non-recurring gain of
$1.0 million from the sale of IHC's remaining real estate in
Florida. Investment income remained constant while realized gains
15
<PAGE>
increased $.1 million. Selling, general and administrative
expenses also remained constant.
LIQUIDITY
---------
Insurance Group
- ---------------
The Insurance Group normally provides cash flow from: (i)
operations; (ii) the receipt of scheduled principal payments on
its portfolio of fixed income securities; and (iii) earnings on
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 Insurance Group's
investment assets, approximately 76.8% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at June 30, 1998. Also at such
date, approximately 97.6% of the Insurance Group's fixed
maturities were investment grade. These investments carry less
risk and, therefore, lower interest rates than other types of
fixed maturity investments. At June 30, 1998, approximately 2.4%
of the carrying value of fixed maturities was invested in
diversified non-investment grade fixed income securities
(investments in such securities have different risks than
investment grade securities, including greater risk of loss upon
default, and thinner trading markets). Less than .1% of the
carrying value of the Company's total investments was in real
estate and mortgage loans. The Company has no non-performing
fixed maturities.
The Company monitors its investment portfolio on a
continuous basis and believes that the liquidity of the Insurance
Group will not be adversely affected by its current investments.
If a 100 basis point change in interest rates on the
Insurance Group's interest sensitive policies were to occur, it
would have a minimal overall financial effect on the Company.
With respect to its liabilities, if interest rates were to
increase, the risk to the Company is that policies would be
surrendered and assets would need to be sold. This is not a
material exposure to the Company since a large portion of the
Insurance Group's interest sensitive policies are burial policies
that are not subject to the typical surrender patterns of other
16
<PAGE>
interest sensitive policies, and many of the Insurance Group's
universal life and annuity policies come from liquidated
companies which tend to exhibit lower surrender rates than such
policies of continuing companies. Additionally, there are
surrender charges to help offset the benefits being surrendered.
If interest rates were to decrease, the risk to the Company is
that its assets would be called. This is not a material exposure
to the Company since it would have additional gains in its
portfolio to help offset the future reduction of investment
income. With respect to its assets, the Company employs
investment strategies to mitigate interest rate and other market
exposures from time to time as warranted.
Balance Sheet
The decrease in cash and cash equivalents was offset by a
decrease in due to brokers attributable to the settlement of a
securities trade that was placed at the end of December 1997, and
settled in January 1998. The increase in due from reinsurers is
attributable to the increase in Standard Life's direct written
special disability business of which a large portion is
reinsured. The increase in future policy liabilities, deferred
policy acquisition costs and notes and other investments is due
to the acquisition of two blocks of business by Madison Life. The
first block was both universal life and traditional ordinary life
policies, involved the transfer of $11.2 million in reserves and
was effective June 1, 1998. The second block of business
consisted entirely of traditional ordinary life policies and had
an effective date of January 1, 1998. Assets were not transferred
until July 15, 1998 on this block and consisted of $30.1 million
of reserves.
The Company had net receivables from reinsurers of $98.3
million at June 30, 1998. Substantially all of the business ceded
to such reinsurers is of short duration. All of such receivables
are current and are either due from highly rated companies or are
adequately secured. Accordingly, no allowance for doubtful
accounts was necessary at June 30, 1998.
Corporate
- ---------
Corporate derives its funds principally from: (i) dividends
and interest income from the Insurance Group; (ii) tax payments
pursuant to tax sharing agreements and management fees from its
subsidiaries; and (iii) investment income from Corporate
liquidity. Regulatory constraints historically have not affected
the Company's consolidated liquidity, although state insurance
laws have provisions relating to the ability of the parent
company to use cash generated by the Insurance Group to fund
operating expenses and dividend payments at Corporate. The
17
<PAGE>
Company remains contingently liable in connection with the
guarantee of $10.0 million of subordinated indebtedness of
Zimmerman Sign Company (see Note 2 of Notes of Consolidated
Financial Statements).
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $19.5 million
at June 30, 1998. At the present time, the Company is not in
need of any long-term financing.
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.
It is anticipated that future acquisitions will be funded
internally from existing capital and surplus and parent company
liquidity. In the event additional funds are required, it is
expected that they would be borrowed. IHC currently has no long-
term debt.
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 at
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. The Company experienced a change in
unrealized gains of $.8 million, net of deferred tax expense, in
total stockholders' equity, reflecting unrealized gains of $2.7
million at June 30, 1998 versus $1.9 million at December 31,
1997. From time to time, as warranted, the Company employs
investment strategies to mitigate interest rate and other market
exposures.
The results of the first six months of 1998 reflect a higher
effective tax rate than in the first six months of 1997 due to
reduced benefits associated with the utilization of net operating
loss carryforwards. As previously reported, IHC expects that its
future results will reflect a higher effective tax rate.
The Company has continued and will continue to take all
steps necessary to address Year 2000 compliance issues. Since the
Company has updated and enhanced many of its primary systems in
the past two years, it does not believe that the Year 2000
18
<PAGE>
problem will pose operational difficulties. The cost of updating
the Company's remaining systems is not expected to have a
material effect on the Company or its results of operations, and
is expected to be completed by the beginning of 1999. The Company
has requested information from, among others, its managing
general underwriters, managing general agents, HMOs, agents,
reinsurers, securities brokers and bankers regarding the status
of their Year 2000 compliance programs, and is in the process of
evaluating any possible impact on the Company.
Some of the statements included within Management's
Discussion and Analysis may be considered to be forward looking
statements which are subject to certain risks and uncertainties.
Factors which could cause the actual results to differ materially
from those suggested by such statements are described from time
to time in the Company's Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission.
19
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At its Annual Meeting of Stockholders held on June 22,
1998, the following seven nominees were re-elected for one-year
terms on the Board of Directors:
Harold E. Johnson, Allan C. Kirkman, Steven B. Lapin,
Donald T. Netter, Edward Netter, Edward J. Scheider
and Roy T.K. Thung
The vote on the election of the above nominees was:
For At least 6,892,189 shares
Withheld No more than 6,580 shares
There were no broker nonvotes.
In addition, at such meeting, the appointment of KPMG
Peat Marwick LLP as independent auditors for 1998 was ratified by
a vote of 6,890,566 shares for, 4,912 shares against, and 3,291
shares abstaining. There were no broker nonvotes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation
of per share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended June 30, 1998.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INDEPENDENCE HOLDING COMPANY
----------------------------
(THE REGISTRANT)
Dated: August 13, 1998 By:/s/ Roy T.K. Thung
-------------------------
Roy T.K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: August 13, 1998 By:/s/ Teresa A. Herbert
-------------------------
Teresa A. Herbert
Vice President and
Controller
21
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------------ -----------------
INCOME:
Net income................$ 2,947 $ 3,191 $ 5,438 $ 5,451
======= ======= ======= =======
SHARES:
Weighted average common
shares outstanding....... 7,435 7,432 7,433 7,432
======= ======= ======= =======
BASIC INCOME PER SHARE:
Net income per share.......$ .40 $ .43 $ .73 $ .73
======= ======= ======= =======
DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of
options..................$ 2,690 $ 2,297 $ 2,533 $ 1,835
Tax benefit from assumed
exercise of options...... 1,105 - 962 -
Repurchase of treasury
stock at the average
market price per share of
$15.24, $7.95, $14.14
and $7.64, respectively.. (3,795) (2,297) (3,495) (1,835)
------- ------- ------- -------
Assumed balance to be
reinvested...............$ - $ - $ - $ -
======= ======= ======= =======
SHARES:
Weighted average shares
outstanding............... 7,435 7,432 7,433 7,432
Shares assumed issued
for options............... 390 354 379 294
Treasury stock assumed
purchased................. (249) (289) (247) (240)
------- ------- ------- -------
Adjusted average shares
outstanding................ 7,576 7,497 7,565 7,486
======= ======= ======= =======
DILUTED INCOME PER SHARE:
Net income per share.......$ .39 $ .43 $ .72 $ .73
======= ======= ======= =======
(A) Warrants were not assumed to be exercised as the effect would
have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-Q for the six months ended June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 208,623,000
<DEBT-CARRYING-VALUE> 00
<DEBT-MARKET-VALUE> 0
<EQUITIES> 23,296,000
<MORTGAGE> 267,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 329,859,000
<CASH> 3,514,000
<RECOVER-REINSURE> 110,730,000
<DEFERRED-ACQUISITION> 20,779,000
<TOTAL-ASSETS> 495,734,000
<POLICY-LOSSES> 232,395,000
<UNEARNED-PREMIUMS> 24,600,000
<POLICY-OTHER> 67,015,000
<POLICY-HOLDER-FUNDS> 3,495,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,436,000
<OTHER-SE> 89,869,000
<TOTAL-LIABILITY-AND-EQUITY> 495,734,000
40,898,000
<INVESTMENT-INCOME> 12,252,000
<INVESTMENT-GAINS> 334,000
<OTHER-INCOME> 2,979,000
<BENEFITS> 31,147,000
<UNDERWRITING-AMORTIZATION> 2,476,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 6,949,000
<INCOME-TAX> 1,511,000
<INCOME-CONTINUING> 5,438,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,438,000
<EPS-PRIMARY> .73
<EPS-DILUTED> .72
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
