FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: SEPTEMBER 30, 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 .
7,378,469 SHARES OF COMMON STOCK, $1.00 PAR VALUE
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Common stock outstanding as of November 10, 1998
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
------------------------------ --------
Consolidated Balance Sheets -
September 30, 1998(unaudited)
and December 31, 1997............................ 3
Consolidated Statements of Operations -
Three Months and Nine Months ended
September 30, 1998 and 1997 (unaudited)......... 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998
and 1997(unaudited)............................. 5
Notes to Consolidated Financial Statements
(unaudited)...................................... 6 - 10
Management's Discussion and Analysis of Results
of Operations and Financial Condition............ 11 - 19
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K........ 20
Signatures....................................... 21
2
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31,
1998 1997
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ASSETS: (UNAUDITED)
Cash and cash equivalents..................$ 21,671,000 $ 23,028,000
Investments:
Short-term investments.................... 16,369,000 18,265,000
Securities purchased under
agreements to resell..................... 4,443,000 25,469,000
Fixed maturities.......................... 235,750,000 201,324,000
Equity securities......................... 15,013,000 13,496,000
Other investments(Note 3)................. 52,205,000 50,459,000
----------- -----------
Total investments...................... 323,780,000 309,013,000
Deferred policy acquisition costs.......... 20,079,000 13,611,000
Due and unpaid premiums.................... 7,775,000 6,448,000
Due from reinsurers........................ 109,152,000 92,990,000
Due from brokers........................... 246,000 -
Notes and other receivables................ 4,684,000 3,292,000
Other assets............................... 8,516,000 6,356,000
----------- -----------
TOTAL ASSETS...........................$495,903,000 $454,738,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities..................$223,815,000 $169,082,000
Unearned premiums.......................... 21,905,000 27,893,000
Funds on deposit........................... 65,070,000 72,187,000
Insurance policy claims.................... 5,829,000 6,279,000
Other policyholders' funds................. 3,553,000 2,651,000
Financial instruments sold, but
not yet purchased......................... 608,000 -
Due to brokers............................. 29,155,000 43,356,000
Due to reinsurers.......................... 10,270,000 4,349,000
Accounts payable, accruals and
other liabilities......................... 18,429,000 23,516,000
Liability for business transferred (Note 2) - 7,905,000
Income taxes............................... 8,036,000 6,515,000
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TOTAL LIABILITIES...................... 386,670,000 363,733,000
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STOCKHOLDERS' EQUITY:
Preferred stock (none issued).............. - -
Common stock, 7,388,469 and 7,430,169
shares issued and outstanding, net
of 2,236,050 and 2,188,950 shares
in treasury, respectively................. 7,388,000 7,430,000
Paid-in capital............................ 83,443,000 76,046,000
Accumulated other comprehensive income:
Unrealized gains on investments,
net of taxes (Notes 5 and 6)............. 4,639,000 1,892,000
Retained earnings ......................... 13,763,000 5,637,000
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TOTAL STOCKHOLDERS' EQUITY............. 109,233,000 91,005,000
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY..................$495,903,000 $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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
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REVENUES:
Premiums earned.......$19,366,000 $21,735,000 $60,264,000 $60,557,000
Net investment income. 3,286,000 6,046,000 15,538,000 15,763,000
Net realized and
unrealized gains
(losses)............. 1,118,000 52,000 1,531,000 (99,000)
Equity income (loss).. 23,000 72,000 (14,000) 151,000
Other income.......... 2,315,000 1,301,000 5,294,000 2,165,000
---------- ---------- ---------- ----------
26,108,000 29,206,000 82,613,000 78,537,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves.. 13,345,000 16,269,000 44,492,000 43,231,000
Amortization of
deferred policy
acquisition costs.... 1,305,000 741,000 3,781,000 2,195,000
Selling, general and
administrative
expenses............. 7,742,000 8,691,000 23,675,000 23,699,000
---------- ---------- ---------- ----------
22,392,000 25,701,000 71,948,000 69,125,000
---------- ---------- ---------- ----------
Operating income
before income taxes.. 3,716,000 3,505,000 10,665,000 9,412,000
Income tax expense
(Note 5)............. 1,028,000 680,000 2,539,000 1,136,000
---------- ---------- ---------- ----------
NET INCOME.............$ 2,688,000 $ 2,825,000 $ 8,126,000 $ 8,276,000
========== ========== ========== ==========
BASIC INCOME PER
COMMON SHARE..........$ .36 $ .38 $ 1.09 $ 1.11
========== ========== ========== ==========
WEIGHTED AVERAGE
BASIC COMMON SHARES
OUTSTANDING........... 7,418,000 7,432,000 7,428,000 7,432,000
========== ========== ========== ==========
DILUTED INCOME
PER COMMON SHARE......$ .36 $ .37 $ 1.08 $ 1.10
========== ========== ========== ==========
WEIGHTED AVERAGE
DILUTED COMMON SHARES
OUTSTANDING........... 7,539,000 7,533,000 7,557,000 7,493,000
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
4
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................$ 8,126,000 $ 8,276,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of deferred policy
acquisition costs....................... 3,781,000 2,195,000
Realized (gains) losses on sales of
investments............................. (1,815,000) 70,000
Unrealized losses on trading
securities.............................. 284,000 30,000
Equity loss (income)..................... 14,000 (151,000)
Depreciation............................. 388,000 308,000
Deferred tax (benefit) expense........... (420,000) 437,000
Other.................................... (240,000) (897,000)
Changes in assets and liabilities:
Net sales (purchases) of trading
securities.............................. 857,000 (2,031,000)
Increase in insurance liabilities........ 43,966,000 42,311,000
Additions to deferred policy
acquisition costs....................... (10,249,000) (1,932,000)
Change in net amounts due from and to
reinsurers.............................. (10,240,000) (33,774,000)
Change in income tax liability........... 344,000 32,000
Change in due and unpaid premiums........ (1,327,000) (2,612,000)
Other.................................... (6,958,000) (856,000)
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Net cash provided by operating
activities.......................... 26,511,000 11,406,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers.................................. (14,446,000) (5,625,000)
Sales and maturities of short-term
investments.............................. 72,749,000 35,166,000
Purchases of short-term investments....... (70,767,000) (32,254,000)
Net purchases of resale agreements........ 21,026,000 18,402,000
Sales and maturities of fixed maturities.. 141,028,000 121,589,000
Purchases of fixed maturities.............(169,067,000) (137,010,000)
Sales of equity securities................ 35,961,000 20,190,000
Purchases of equity securities............ (38,014,000) (27,159,000)
Proceeds on sales of other investments.... 6,275,000 3,081,000
Other investments, net.................... (8,035,000) (13,955,000)
Other..................................... (1,771,000) (677,000)
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Net cash used by investing
activities.......................... (25,061,000) (18,252,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options.......... 55,000 -
Repurchase of common stock................ (605,000) -
Payments of investment-type insurance
contracts................................ (1,885,000) (1,818,000)
Dividends paid............................ (372,000) (372,000)
----------- -----------
Net cash used by financing
activities......................... (2,807,000) (2,190,000)
----------- -----------
Decrease in cash and cash equivalents..... (1,357,000) (9,036,000)
Cash and cash equivalents, beginning
of year.................................. 23,028,000 10,361,000
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Cash and cash equivalents, end of period..$ 21,671,000 $ 1,325,000
=========== ===========
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 nine months ended September
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 guaranteed $10,000,000 of
subordinated debt of Zimmerman (the "Guarantee"). On September
30, 1998, the Guarantee was terminated; accordingly, a deferred
credit (which was incurred in connection with the spin-off of
Zimmerman) of $7,905,000, or $1.06 per share, was credited to
stockholders' equity as of September 30, 1998.
NOTE 3. OTHER INVESTMENTS
The Company had invested $16,618,000 and $18,449,000 at
September 30, 1998 and 1997, respectively, in Dolphin Limited
Partnership-A ("Dolphin"), a private limited partnership that
invests principally in relatively "market neutral" strategies
which are less affected by general movements in the equity and
fixed income markets than traditional investments, including
"risk/merger arbitrage" and "convertible arbitrage." "Risk/merger
arbitrage" is an investment approach designed to profit from the
successful completion of proposed mergers, takeovers, tender
offers, leveraged buy-outs, recapitalizations and spin-offs.
"Convertible arbitrage" is a strategy principally designed to
capitalize on discrepancies in the pricing of convertible
securities and their underlying common stocks or stock
equivalents. To a lesser extent, Dolphin also invests in
"distressed situations" which principally means entities which
are in bankruptcy proceedings or are otherwise financially
distressed. The condensed statements of operations for Dolphin
for the three months and nine months ended September 30, 1998 and
1997 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 1998 1997
------------------ ------------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues...........$ (659) $ 2,949 $ 2,518 $ 9,191
Net (loss) income..$ (787) $ 2,213 $ 1,313 $ 6,774
IHC's share of
net (loss) income.$ (367) $ 1,076 $ 561 $ 3,107
7
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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 121,000 and 101,000 shares for the
three months ended September 30, 1998 and 1997 and 129,000 and
61,000 shares for the nine months ended September 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 nine months
ended September 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
$2,632,000 and $676,000 for the nine months ended September 30,
1998 and 1997, respectively.
The income tax expense for the nine months ended September
30, 1998 allocated to stockholders' equity for unrealized gains
on investment securities was $1,597,000 representing the change
in deferred tax liability of $2,641,000 at September 30, 1998
from $1,044,000 at December 31, 1997.
NOTE 6. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components. The components of comprehensive income
include net income and certain amounts previously reported
directly in equity.
8
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 6. COMPREHENSIVE INCOME (CONTINUED)
Disclosures related to comprehensive income for the three
months and nine months ended September 30, 1998 and 1997 are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
1998 1997 1998 1997
------------------ -------------------
(IN THOUSANDS) (IN THOUSANDS)
(A) COMPREHENSIVE INCOME
Net income................$ 2,688 $ 2,825 $ 8,126 $ 8,276
Unrealized gains
on securities, net
of reclassification...... 1,939 2,146 2,747 3,046
------ ------ ------ ------
Comprehensive
income..............$ 4,627 $ 4,971 $10,873 $11,322
====== ====== ====== ======
(B) RECLASSIFICATION
Unrealized gains, net.....$ 1,576 $ 2,208 $ 2,463 $ 3,016
Less: reclassification
for unrealized (losses)
gains included in net
income................... (363) 62 (284) (30)
------ ------ ------ ------
Unrealized gains
on securities, net.......$ 1,939 $ 2,146 $ 2,747 $ 3,046
====== ====== ====== ======
(C) ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning balance.........$ 2,700 $ (566) $ 1,892 $(1,466)
Unrealized gains
on securities, net....... 1,939 2,146 2,747 3,046
------ ------ ------ ------
Ending balance............$ 4,639 $ 1,580 $ 4,639 $ 1,580
====== ====== ====== ======
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
("FASB") 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 June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The requirements
for SFAS No. 133 are effective for financial statements for
periods ending after June 15, 1999. The Company is evaluating the
Statement but does not expect it to have a material impact on the
Company.
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 SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------
The Company's operating income increased $.2 million to $3.7
million for the period ended September 30, 1998 from $3.5 million
for the same period in 1997. Net income was $2.7 million, or $.36
per share, diluted, for the quarter ended September 30, 1998
compared to $2.8 million, or $.37 per share, diluted, for the
quarter ended September 30, 1997. The Company had net realized
and unrealized gains of $1.1 million in 1998 and $.1 million in
1997. Excluding net realized and unrealized gains or losses, the
Company had operating income of $2.6 million in 1998 as compared
to $3.5 million in 1997, a decrease of 24.8%, which approximately
consists of: the decrease in yields on investable assets, ($3.1
million), and a decrease in acquisitions at Madison Life, ($.2
million), offset by an increase due to all other lines of
business, $2.4 million. Income tax expense increased to $1.0
million in 1998 from $.7 million in 1997 (see Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $.5 million
to $4.1 million in 1998 from $3.6 million in 1997. Operating
income includes net realized and unrealized gains of $1.1 million
in 1998 compared to $.1 million in 1997. Decisions to sell
securities are based on cash flow needs, investment opportunities
and economic and market conditions, thus creating fluctuations in
gains from year to year. Operating income (excluding net realized
and unrealized gains) was $3.0 million in 1998 compared to $3.6
million in 1997, a decrease of 15.5%.
Premiums earned decreased $2.4 million to $19.4 million in
1998 from $21.7 million in 1997; premiums earned decreased $.8
11
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million at Madison Life and $1.6 million at Standard Life. The
decrease at Madison Life is comprised of: a $1.2 million
decrease in the credit lines of business primarily due to the
recording of two quarters of activity on an acquired block in the
third quarter of 1997, followed by the expected decrease in
activity on that block in 1998; offset by a $.1 million increase
in long-term disability premiums; and a $.3 million increase in
ordinary life and individual A & H premiums. The change at
Standard Life is comprised of: a $.4 million decrease in its DBL
line due to a higher lapse rate in 1998; a $.3 million decrease
in HMO premiums due to a reinsurance adjustment on an assumed
block of business; a $.6 million decrease in point of service
premiums due to a retroactive adjustment and the loss of one
large policy contract in 1998; and a $.3 million decrease in stop-
loss premiums.
Total net investment income decreased $2.1 million primarily
due to lower returns on certain hedged equity and distressed
situation investments in the third quarter of 1998 slightly
offset by an increase in assets at Madison Life related to
acquisitions. The annualized return on investments of the
Insurance Group in the third quarter of 1998 was 4.4% compared to
7.9% in the third quarter of 1997.
Other income increased $.7 million. Madison Life had an
increase of $1.0 million due to fee income earned by the managing
general underwriter ("MGU") of which Madison Life acquired a
controlling interest effective December 31, 1997. Such fee income
of the MGU was offset by expenses described below in general and
administrative expenses. Other income at Standard Life decreased
$.3 million from a decrease in fee income. Equity income from
partnerships is approximately the same.
Insurance benefits, claims and reserves decreased $2.8
million reflecting a decrease of $.3 million at Madison Life and
a decrease of $2.5 million at Standard Life. Madison Life's
decrease resulted from: a $.5 million decrease in the credit
lines of business due to the recording of two quarters of
activity on an acquired block in the third quarter of 1997,
followed by the expected decrease in activity on that block in
1998; and a $.1 million decrease in group term life claims;
offset by a $.2 million increase in interest credited to
universal life and annuity products and a $.1 million increase in
long-term disability claims. The change at Standard Life is
comprised of: a $.5 million decrease in HMO reserves due to a
reinsurance adjustment on an assumed block of business; a $1.0
million decrease in additional DBL claims and reserves due to
improved experience ($.6 million) and lower premiums ($.4
million); a $.3 million decrease in stop-loss reserves; a $.4
million decrease in point of service claims and reserves due to a
retroactive adjustment and the loss of one large policy contract
in 1998; and a $.6 million decrease in reserves in the closed
blocks of life, annuity and individual and group accident and
12
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health lines of business; such decreases were offset by a $.3
million increase in dividends to policyholders.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
decreased $.4 million. Madison Life's expenses increased $.5
million and Standard Life's expenses decreased $.9 million. The
increase at Madison Life is primarily due to an increase in other
general expenses of $1.1 million related to the MGU acquired on
December 31, 1997 offset by a decrease in commissions of $.6
million related to the acquisition of new blocks of business in
1997. The decrease at Standard Life is primarily due to a
reduction in net commission expense of $.4 million attributable
to the increase in expense allowances received from reinsurers on
its HMO and special disability line of business as a result of
the increase in gross premiums and a $.5 million decrease in
general expenses from the third party administrator in which
Standard Life sold its interest in December 1997.
Corporate
- ---------
Operating loss for the quarter ended September 30, 1998
increased $.3 million to a loss of $.4 million as compared to a
loss of $.1 million for the quarter ended September 30, 1997.
Investment income decreased $.6 million from 1997 due to lower
returns from certain hedged equity investments in 1998. Other
income increased $.3 million as a result of fee income earned
from the termination of the guarantee of the debt of Zimmerman
Sign Company ("Zimmerman"). Selling, general and administrative
expenses remained constant.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1997
- -----------------------------------------------------------------
The Company's operating income increased $1.3 million to
$10.7 million for the period ended September 30, 1998 from $9.4
million for the same period in 1997. Net income was $8.1 million,
or $1.08 per share, diluted, for the nine months ended September
30, 1998 compared to $8.3 million, or $1.10 per share, diluted,
for the nine months ended September 30, 1997. The Company had net
realized and unrealized gains of $1.5 million in 1998 and losses
of $.1 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 real estate gain
in 1997, the Company had operating income of $9.1 million in 1998
as compared to $8.5 million in 1997, an increase of 7.9%, which
approximately consists of: acquisitions of blocks of business
made at Madison Life, $1.6 million, the increase in other lines
of business, $2.2 million, offset by the decrease in yield on
investable assets,($3.2 million). Income tax expense increased to
$2.5 million in 1998 from $1.1 million in 1997 (see Capital
Resources).
13
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Insurance Group
- ---------------
The Insurance Group's operating income increased $2.3
million to $11.1 million in 1998 from $8.8 million in 1997.
Operating income includes net realized and unrealized gains of
$1.4 million in 1998 compared to losses of $.1 million in 1997.
Operating income (excluding net realized and unrealized gains or
losses) was $9.7 million in 1998 compared to $8.9 million in
1997, an increase of 9.3%.
Premiums earned decreased $.3 million to $60.3 million in
1998 from $60.6 million in 1997; premiums earned at Madison Life
increased $4.3 million while Standard Life had a $4.6 million
decrease in premiums earned. The increase at Madison Life is
comprised of: a $3.1 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 $.5
million increase in long-term disability premiums; and a $.7
million increase in the ordinary life and individual accident and
health lines of business. The change at Standard Life is
comprised of: a $.7 million decrease in its DBL line; a $.7
million decrease in HMO premiums due to a reinsurance adjustment
on an assumed block of business; a $.5 million decrease in stop-
loss premiums; a $1.1 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 $1.6 million decrease in point of service premiums due to
the loss of one large policy contract and a retroactive
adjustment in 1998.
Total net investment income increased $.4 million primarily
due to an increase in assets at Madison Life related to
acquisitions offset by lower returns on certain hedged equity and
distressed situation investments. The annualized return on
investments of the Insurance Group in the first nine months of
1998 was 6.3% compared to 7.6% in the first nine months of 1997.
Other income increased $3.9 million. Madison Life's income
increased $2.3 million primarily from fee income earned by the
MGU acquired on December 31, 1997. Such fee income of the MGU was
offset by expenses described below in general and administrative
expenses. Other income at Standard Life increased $1.6 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 increase was offset by a $.7
million decrease in fee income from the third party administrator
in which Standard Life sold its interest in December 1997. Equity
income from partnerships decreased by $.2 million.
Insurance benefits, claims and reserves increased $1.3
million, reflecting an increase of $4.2 million at Madison Life
and a $2.9 million decrease at Standard Life. Madison Life's
increase resulted from: a $2.0 million increase in the credit
14
<PAGE>
line of business and a $.8 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 $.3
million increase in group term life claims; a $.4 million
increase in long-term disability claims due to the increased
volume; and a $.1 million increase in claims and reserves in
other life and health lines of business. The change at Standard
Life is comprised of: a $.9 million decrease in HMO reinsurance
reserves due to a reinsurance adjustment on an assumed block of
business; and a $1.9 million decrease in DBL claims and reserves
due to improved experience ($1.3 million) and decreased volume
($.6 million); a $.9 million decrease in stop-loss reserves; a
$.9 million decrease in point of service claims and reserves due
to the retroactive adjustment and the loss of one large policy
contract in 1998; and a $.3 million decrease in the individual A
& H line due to improved experience; such decreases were offset
by: a $1.8 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 and a $.2 million increase in dividends to
policyholders.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $1.7 million. Madison Life's expenses increased $3.8
million and Standard Life's expenses decreased $2.1 million. The
increase at Madison Life is primarily due to increases in
commissions of $1.1 million and other general expenses of $.7
million related to the increase in premium volume from the
acquisition of new blocks of business. In addition, Madison Life
had $2.0 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 $1.6 million
attributable to the increase in expense allowances received from
reinsurers on its HMO and special disability lines of business as
a result of the increase in gross premiums and a $.5 million
decrease in general expenses.
Corporate
- ---------
Operating loss for the nine months ended September 30, 1998
was $.4 million as compared to income of $.6 million for the nine
months ended September 30, 1997, a decrease of $1.0 million.
Included in the nine months ended September 30, 1997 is a non-
recurring gain of $1.0 million from the sale of IHC's remaining
real estate in Florida. Investment income decreased $.6 million
due to lower returns on certain hedged equity investments.
Realized gains increased $.1 million. Other income, excluding the
non-recurring gain, increased by $.3 million in 1998 as a result
of fee income earned from the termination of the guarantee of
certain subordinated indebtedness of Zimmerman (see Note 2 of
15
<PAGE>
Notes to Consolidated Financial Statements). Selling, general and
administrative expenses decreased by $.2 million.
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 80.7% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at September 30, 1998. Also at
such date, approximately 97.8% 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 September 30, 1998, approximately
2.2% 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
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
16
<PAGE>
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 securities would be subject to early redemption. 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 securities purchased under agreements to
resell 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 and to 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 fixed
maturities 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 transferred on July 15, 1998 on this block and
consisted of $30.1 million of reserves. The decrease in liability
for business transferred and corresponding credit to Paid-in-
Capital resulted from the termination of the guarantee of certain
subordinated indebtedness of Zimmerman on September 30, 1998 (see
Note 2 of Notes of Consolidated Financial Statements).
The Company had net receivables from reinsurers of $98.9
million at September 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 September 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.
17
<PAGE>
Total corporate liquidity (cash, cash equivalents, resale
agreements and marketable securities) amounted to $17.9 million
at September 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 $2.7 million, net of deferred tax expense, in
total stockholders' equity, reflecting unrealized gains of $4.6
million at September 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 nine months of 1998 reflect a
higher effective tax rate than in the first nine 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 several years, it does not believe that the Year 2000
problem will pose internal operational difficulties and expects
that all internal systems will be Year 2000 compliant by the
first quarter of 1999. Given the recent large expenditures by
Standard Life and Madison Life to upgrade their systems, the cost
of updating the Company's remaining systems is not expected to
exceed $100,000. The Company believes that its greatest Year 2000
exposure arises from the possibility of non-compliance by, among
others, its MGU's, managing general agents, HMOs, agents, third
18
<PAGE>
party administrators, producers, reinsurers, securities brokers
and bankers. The Company has requested information from these
third parties and is in the process of evaluating any possible
impact on the Company. In the event that some of these third
parties are not Year 2000 compliant, the Company could experience
difficulties in claims adjudication and obtaining correct
underwriting and financial data, and could suffer a loss in
business as a result of these third parties consolidating, going
out of business or suffering operational or financial problems.
The Company is in the development stages of formulating a
contingency plan with respect to this exposure.
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 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 11. Statement re: computation
of per share earnings.
2) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended September 30, 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: November 13, 1998 By:/s/ Roy T.K. Thung
------------------------
Roy T.K. Thung
Executive Vice President,
Chief Financial Officer
and Treasurer
Dated: November 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------------ -----------------
INCOME:
Net income................$ 2,688 $ 2,825 $ 8,126 $ 8,276
====== ====== ====== ======
SHARES:
Weighted average common
shares outstanding....... 7,418 7,432 7,428 7,432
====== ====== ====== ======
BASIC INCOME PER SHARE:
Net income per share.......$ .36 $ .38 $ 1.09 $ 1.11
====== ====== ====== ======
DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of
options..................$ 2,533 $ 2,533 $ 2,533 $ 2,297
Tax benefit from assumed
exercise of options...... 809 577 910 276
Repurchase of treasury
stock at the average
market price per share of
$12.95, $11.14, $13.74
and $8.80, respectively.. (3,342) (3,110) (3,443) (2,573)
------ ------ ------ ------
Assumed balance to be
reinvested...............$ - $ - $ - $ -
====== ====== ====== ======
SHARES:
Weighted average shares
outstanding............... 7,418 7,432 7,428 7,432
Shares assumed issued
for options............... 379 380 379 353
Treasury stock assumed
purchased................. (258) (279) (250) (292)
------ ------ ------ ------
Adjusted average shares
outstanding................ 7,539 7,533 7,557 7,493
====== ====== ====== ======
DILUTED INCOME PER SHARE:
Net income per share.......$ .36 $ .37 $ 1.08 $ 1.10
====== ====== ====== ======
(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 nine months ended September 30,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 235,750,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 15,013,000
<MORTGAGE> 256,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 323,172,000
<CASH> 21,671,000
<RECOVER-REINSURE> 109,152,000
<DEFERRED-ACQUISITION> 20,079,000
<TOTAL-ASSETS> 495,903,000
<POLICY-LOSSES> 229,644,000
<UNEARNED-PREMIUMS> 21,905,000
<POLICY-OTHER> 65,070,000
<POLICY-HOLDER-FUNDS> 3,553,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,388,000
<OTHER-SE> 101,845,000
<TOTAL-LIABILITY-AND-EQUITY> 495,903,000
60,264,000
<INVESTMENT-INCOME> 15,538,000
<INVESTMENT-GAINS> 1,815,000
<OTHER-INCOME> 5,294,000
<BENEFITS> 44,492,000
<UNDERWRITING-AMORTIZATION> 3,781,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 10,665,000
<INCOME-TAX> 2,539,000
<INCOME-CONTINUING> 8,126,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,126,000
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.08
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
