SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
(203) 358-8000
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(Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
SHARE PURCHASE WARRANTS
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
7,355,800 shares of common stock were outstanding as of
March 23, 1999.
The aggregate market value of the common stock held by non-
affiliates of the Registrant computed by reference to the average
bid and asked prices of such stock, as of March 23, 1999 was
$40,549,565.
The Exhibit Index is located on page 82 of this filing.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of
Stockholders scheduled for June 22, 1999 are incorporated by
reference into Part III of this filing.
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PART I
ITEM 1. BUSINESS
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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."
Standard Life, which has an A (Excellent) rating from A.M.
Best & Company, Inc. ("Best"), is domiciled in New York and
licensed as an insurance company in all 50 states, the District
of Columbia, the Virgin Islands and Puerto Rico. Madison Life,
which is domiciled in Wisconsin and licensed to sell insurance
products in 46 states, the District of Columbia and the Virgin
Islands, has a B++ (Very Good) rating from Best. First Standard
is domiciled in Delaware and licensed to write and reinsure
property and casualty insurance in Delaware and New York. Based
on information provided by Best, a Best's rating is assigned
after an extensive quantitative and qualitative evaluation of a
company's financial condition and operating performance. Best
ratings are based upon factors relevant to policyholders, agents,
and intermediaries, and are not directed toward protection of
investors. Best ratings are not recommendations to buy, sell or
hold securities of IHC.
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC common stock as of December
20, 1996. Since December 1995, the Consolidated Financial
Statements of the Company have presented Zimmerman as
discontinued operations (see Notes 2 and 10 of Notes to
Consolidated Financial Statements).
For information pertaining to the Company's business
segments, reference is made to Note 18 of Notes to Consolidated
Financial Statements.
PRINCIPAL PRODUCTS AND SERVICES
Medical Stop-Loss
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Standard Life markets, throughout the United States, stop-
loss insurance for self-insured group medical plans. Medical
stop-loss insurance allows self-insured employers to manage the
risk of excessive health insurance exposures by limiting
aggregate and specific losses to a predetermined amount. Self-
insured plans permit employers flexibility in designing employee
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health coverages at a cost that may be lower than that available
through other health care plans.
Medical stop-loss coverage is available on either a specific
or a specific and aggregate basis, although the majority of the
policies issued by Standard Life cover both specific and
aggregate claims. Standard Life designs plans to fit the
identified needs of the self-insured employer by offering a
variety of attachment points with respect to aggregate coverage
(i.e., the level of claims after which the medical stop-loss
benefits become payable) and, with respect to specific coverage,
various deductible options.
Standard Life markets its medical stop-loss products through
a network of managing general underwriters ("MGUs") who are non-
salaried independent contractors that receive administrative
fees. During 1998, Standard Life marketed through ten different
MGUs. The MGUs are responsible for underwriting accounts in
accordance with guidelines formulated and approved by Standard
Life, billing and collecting premiums from the employers, paying
commissions to third party administrators ("TPAs") and/or
brokers, and adjudicating claims. Standard Life is responsible
for selecting MGUs, establishing underwriting guidelines and
reviewing employers' claims for reimbursement, as well as
establishing appropriate accounting procedures and reserves.
Standard Life has also begun marketing this product through its
Health Maintenance Organization ("HMO") relationships, as further
described below under "Managed Health Care."
Individuals who obtain health coverage through such self-
insured plans cannot currently sue their employer in state court
for punitive or compensatory damages, but can seek legal recourse
in federal court where an employer can be ordered to cover and
deliver a wrongfully-denied benefit. In the continuing debate
over health care reform, certain federal and state legislation
has been proposed which could permit plan sponsors,
administrators, or certain other parties to be liable for
punitive damages in state court. Currently, such federal
legislation initiatives include: the "Patients' Bill of Rights
Act of 1999" (S. 300 H.R. 358), the "Access to Quality Care Act
of 1999" (H.R. 216), the "Managed Care Reform Act of 1999" (H.R.
719), and the "Promoting Responsible Managed Care Act of 1999"
(S. 374). While the Company cannot predict whether any of these
proposals will be adopted or what, if any, impact enactment of
any of these (or any similar state legislation) would have on its
medical stop-loss business, the number of employers offering
health benefits or choosing self-insured plans could be reduced,
plans could increase the portion paid by employees (thereby
reducing participation), the Company's pricing could be affected,
and the Company could be faced with greater liability exposures.
As with past initiatives which were not enacted, the Company
believes that any such initiatives that could ultimately be
implemented should continue to recognize employer's self-
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insurance of health care benefits as a viable and cost-effective
method of financing health care for employees and their families.
New York Short-Term Disability
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Standard Life markets a short-term statutory disability
benefit product in New York State ("DBL"). All companies with
more than one employee in New York State are required to provide
DBL insurance for their employees. DBL coverage provides
temporary cash payments to replace wages lost as a result of
disability due to non-occupational injury or illness. The DBL
policy provides for (i) payment of 50% of salary to a maximum of
$170 per week; (ii) a maximum of 26 weeks in a consecutive 52
week period; and (iii) benefit commencement on the eighth
consecutive day of disability. Policies covering fewer than 50
employees have fixed rates approved by the New York State
Insurance Department. Policies covering 50 or more employees are
individually underwritten. The DBL business is marketed primarily
through independent general agents who are paid commissions based
upon the amount of premiums produced. Standard Life has completed
a significant enhancement to its DBL administrative systems, and
anticipates continuing to expand its DBL business through the
addition of general agents and the acquisition of blocks of
business.
Group Term Disability and Term Life
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Group Long-Term and Short-Term Disability
Madison Life sells group long-term and short-term disability
products to employers that wish to provide this benefit to their
employees. Depending on an employer's requirements, long-term
disability policies (i) cover between 50% and 70% of insurable
salary; (ii) have elimination periods (i.e., the period between
the commencement of the disability and the start of benefit
payments) of between 30 and 730 days; and (iii) terminate after
two, five or ten years or extend to age 65. Optional benefits
are available to employees, including coverage for partial or
residual disabilities, survivor benefits and cost of living
adjustments. Short-term disability policies provide a weekly
benefit to disabled employees until they are eligible for long-
term disability benefits or they are no longer disabled.
Madison Life's disability products are sold primarily in the
Midwest to school districts, municipalities and hospital employer
groups through a managing general agent ("MGA") that specializes
in these target markets. This MGA assists in the billing and
administration of the business, and is paid commissions based
upon the amount of premiums produced. Madison Life has expanded
its marketing to non-governmental businesses through non-salaried
independent general agents and agents who are paid commissions
based upon the amount of premiums produced. Madison Life has also
entered into an agreement with another insurer to sell group long-
term disability in markets in which Madison Life is not currently
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established. Under the agreement, the other insurer issues
policies as to which the underwriting, claims processing and
related services are performed by Madison Life for a fee; Madison
Life has retained 25% of the risk on this business.
Madison Life intends to increase sales by targeting non-
governmental business and maximizing its traditionally strong
sales to school districts, municipalities and hospital employer
groups.
Group Term Life
Madison Life sells group term life products which are
marketed primarily to the same customers that purchase its group
short-term and long-term disability products. These products
include group term life, accidental death and dismemberment
("AD&D"), supplemental life and AD&D and dependent life. In
order to enhance its marketing and retention of this line of
business, Madison Life also offers a paid-up life benefit for
eligible employees of schools and municipalities beginning at age
65, subject to a vesting schedule. Madison Life's group term life
products are distributed by the same MGA and independent general
agents and agents that distribute its group disability products,
with compensation based upon the amount of premiums produced. As
with its group disability business, Madison Life intends to
expand its sales of group term life products to non-governmental
entities.
Standard Life also markets group term life insurance
products primarily through its existing distribution channels,
including its medical stop-loss and managed care MGUs, to
employers who self-insure or who enroll in HMOs, as well as to
the employees of such employers and HMO's. In 1998, Standard Life
purchased and installed a group life system and appointed
additional MGUs, independent general agents and brokers to
enhance the marketing of its group term life business. The
independent general agents and agents or brokers who market these
products are paid commissions, and MGUs who market these products
receive administrative fees.
Credit Life and Disability
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Madison Life sells credit life and disability products
offered by entities that extend credit (e.g. banks, thrifts,
credit unions and finance companies) or arrange for the extension
of credit (e.g., automobile, marine and furniture dealerships)
insuring the debtor for a value and duration not to exceed the
amount and repayment term of the indebtedness. Credit insurance
is composed of two basic types of coverage: (i) credit life
insurance provides for a lump sum benefit paid to the creditor
upon the death of the insured debtor to extinguish or reduce the
balance of indebtedness; and (ii) credit disability insurance
provides a monthly benefit/indemnity (usually a sum equal to the
scheduled monthly loan payment) paid to the creditor in the event
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of the insured debtor's total disability until the debtor
recovers, or is able to return to gainful employment or until the
scheduled expiration of the insurance coverage, whichever first
occurs.
Generally, Madison Life's coverage is limited as follows:
(i) at inception of coverage, insureds must be under age 70 for
life and under age 65 for disability; (ii) coverage terminates at
age 71 for life and age 66 for disability; (iii) maximum life
insurance or aggregate disability benefits are $110,000, and the
maximum monthly disability benefit is $1,000; and (iv) the
maximum term of coverage is 120 months.
Approximately 80% of Madison Life's credit insurance
premiums are written through credit unions. This business is
marketed by non-salaried independent general agents and agents
who are paid commissions based upon the amount of premiums
produced.
In 1998, Madison Life purchased a credit insurance agency
with $4,000,000 of credit life and disability premiums, as well
as an affiliated reinsurance company. This acquisition is
expected to increase Madison Life's direct credit insurance
premium volume by approximately 29% in 1999.
In addition to expanding its credit life and disability
business through its credit insurance agency, Madison Life
intends to expand through greater geographical diversification,
agreements to administer blocks of business for other insurers,
joint marketing alliances with other insurers and acquisitions.
Managed Health Care
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HMO Reinsurance
Standard Life markets, throughout the United States,
reinsurance for HMOs that desire to reduce their risk assumption
and/or are required to purchase coverage by regulation. A
majority of state regulatory authorities responsible for HMO
oversight require such coverage. This coverage allows HMOs to
manage the risk of excessive exposures by limiting specific
losses to a pre-determined amount. Standard Life markets HMO
reinsurance through independent reinsurance managers (with
experienced management and staff knowledgeable in reinsurance
issues specifically facing HMOs) which are responsible for
collecting premiums and adjudicating reinsurance claims. Final
authority for all financial decisions remains with Standard Life,
although financial reviews of each HMO are performed on behalf of
Standard Life by an independent firm whose primary business is
managed care.
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HMO Point-of-Service ("POS")
Standard Life has capitalized on the competitive pressures
in the HMO market by marketing POS coverage throughout the United
States through its HMO relationships. A POS product allows a
member greater freedom of choice of providers and/or the ability
to access care without a gatekeeper or primary care physician
referral; both mature and start-up HMOs are experiencing
difficulty in attracting and retaining members unless they are
able to offer such options. Most states require that HMOs
desiring to offer a POS product do so by partnering with an
indemnity carrier (such as Standard Life). While the marketing of
the POS product began in 1995 with its behavioral health carve-
out product, Standard Life has accelerated its sales efforts and
committed more of its resources to this sector. With respect to
the POS product, Standard Life retains final responsibility for
underwriting, issuing policies, billing and collecting of
premiums, paying commissions and servicing claims.
HMO Employer Medical Stop-Loss
Standard Life markets its employer medical stop-loss
products (and certain other products including group term life)
through its HMO distribution network. Like Standard Life's other
medical stop-loss product, these plans allow self-insured
employers to manage the risk of excessive health insurance
exposures by limiting aggregate and specific losses to a
predetermined amount, as well as utilizing the managed care
expertise of the HMOs to manage losses. With respect to the HMO
employer medical stop-loss product, Standard Life retains final
responsibility for underwriting, issuing policies, billing and
collecting of premiums, paying commissions and servicing claims.
Provider-Excess
Standard Life markets provider-excess products to providers,
provider health care organizations ("PHOs"), hospital groups,
physician groups and individual practice associations ("IPAs")
that have assumed risk (through capitation by an HMO or
otherwise) and desire to reduce their risk assumption and/or are
required to purchase coverage by contract or regulation. Standard
Life writes these products through specialized MGUs with
management and staff experienced in provider-excess insurance.
These MGUs are responsible for marketing, underwriting and
administering and adjudicating claims.
Standard Life maintains a low risk profile on each of these
managed health care products by reducing its exposure through
quota share reinsurance arrangements.
Managed Health Care Investments
Madison Life and Standard Life, through investment
subsidiaries, participate on an equity basis in two development-
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stage ventures which market provider-excess, HMO reinsurance and
HMO employer medical stop-loss products through their proprietary
market databases and alliances with various partners. In
addition, the Company acquired in 1997 a significant interest in
an MGU that markets Standard Life products; the Company believes
that this acquisition will enable it to control a substantial
portion of Standard Life's distribution network for its core
products, as well as other products which this MGU may develop
and/or market in the future.
Leveraging on Standard Life's position in the areas of HMO
reinsurance, POS, HMO employer medical stop-loss and provider-
excess, the Company has formed a new entity, IndependenceCare LLC
("IndependenceCare"). Through its operating companies,
IndependenceCare will market consulting services and various
insurance products (of Standard Life and of one of the largest
domestic professional property/casualty reinsurers) on a
nationwide basis to a broad range of managed care organizations.
The Company believes that these new entities will further enhance
its ability to compete in the managed care market.
The Company is actively increasing its presence in managed
health care through Standard Life's HMO reinsurance, POS, HMO
employer medical stop-loss, provider-excess and related products,
and its managed care investments. In addition, the Company
actively seeks opportunities to enter into cooperative
underwriting and reinsurance arrangements with other life and
health insurers, reinsurers, HMOs, and managed care companies
that it believes would augment its existing businesses.
Special Disability
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During the last half of 1996, Standard Life commenced
providing disability income, accident medical, accidental death,
and AD&D insurance to athletes, executives and entertainers. The
coverage is written for a limited term (5 years or less) and is
optionally renewable by Standard Life. The principal benefits
offered are permanent total disability ("PTD") and temporary
total disability ("TTD"). PTD is paid as a lump sum if caused by
either an injury or sickness which is career ending. TTD covers
the same risks as PTD, but is paid in installments until the
maximum limit of insurance is exhausted or the insured no longer
has a total disability. For these special risks, Standard Life
has delegated marketing and underwriting authority to a
specialized MGU which has concentrated its efforts in these
markets for more than 15 years. Currently, Standard Life insures
no more than half of the value of the individual's contract,
thereby sharing the risk with another party (e.g., a team or a
corporate sponsor). In addition, Standard Life has minimized its
risk on such business by obtaining reinsurance on a quota share
or facultative basis.
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Acquired Blocks/Other Business
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This category includes: (i) insurance products which are in
runoff as a result of the Insurance Group's decision to
discontinue writing such products; (ii) blocks of business which
were acquired from other insurance companies but which are not of
the type currently being written by the Insurance Group (acquired
blocks of business of the type currently being written are
included within the specified product group); and (iii) certain
miscellaneous insurance products.
The following lines of Standard Life's in-force business are
in runoff: individual accident and health, individual life,
single premium immediate annuities, and miscellaneous insurance
business. Madison Life's runoff in this category consists of
existing blocks of individual life (including pre-need (i.e.,
funeral expense coverage) and interest-sensitive life blocks
which were acquired in 1996, 1997 and 1998), individual accident
and health products, annual and single premium deferred annuity
contracts and individual annuity contracts.
The following table sets forth gross direct and assumed
earned premiums and net premium income of the Insurance Group by
principal product for the years indicated (in thousands):
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GROSS DIRECT AND ASSUMED EARNED PREMIUMS
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1998 1997 1996
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Medical Stop-Loss............$ 92,549 $ 89,565 $ 84,228
DBL.......................... 20,912 21,937 16,673
Group Term Disability and
Term Life................... 26,252 21,618 19,325
Credit Life and Disability... 22,696 20,115 13,931
Managed Health Care.......... 41,978 26,357 13,764
Special Disability........... 24,922 15,332 1,604
Acquired Blocks/Other
Business.................... 13,590 15,673 12,935
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TOTAL......................$ 242,899 $ 210,597 $ 162,460
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PREMIUMS EARNED
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1998 1997 1996
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Medical Stop-Loss............$ 19,614 $ 19,706 $ 20,272
DBL.......................... 20,912 21,937 16,673
Group Term Disability and
Term Life................... 9,394 7,560 6,896
Credit Life and Disability... 20,288 17,946 11,549
Managed Health Care.......... 1,034 5,255 4,473
Special Disability........... 196 71 10
Acquired Blocks/Other
Business.................... 9,220 9,726 9,712
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TOTAL......................$ 80,658 $ 82,201 $ 69,585
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The following table summarizes the aggregate life insurance
in-force of the Insurance Group (in thousands):
1998 1997 1996
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LIFE INSURANCE IN-FORCE:
Group........................$5,078,640 $4,322,371 $3,759,716
Individual term.............. 347,253 302,583 343,674
Individual permanent......... 482,210 446,015 454,386
Credit....................... 832,486 1,081,515 494,506
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TOTAL LIFE INSURANCE
IN-FORCE (1), (2)..........$6,740,589 $6,152,484 $5,052,282
========= ========= =========
NEW LIFE INSURANCE:
Group........................$ 942,001 $ 682,296 $ 953,327
Individual term.............. - 11 91
Individual permanent......... - 1,023 339
Credit....................... 302,426 268,682 233,066
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TOTAL NEW LIFE INSURANCE....$1,244,427 $ 952,012 $1,186,823
========= ========= =========
NOTES:
(1) Includes participating
insurance...............$ 91,998 $ 59,897 $ 31,928
========= ========= =========
(2) Includes ceded
reinsurance of:
Group..................$2,526,261 $2,118,806 $1,828,969
Individual............. 246,102 283,405 342,689
Credit................. 51,320 40,794 43,875
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Total ceded reinsurance..$2,823,683 $2,443,005 $2,215,533
========= ========= =========
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ACQUISITIONS
The Company has assembled a team of senior executives which
is responsible for identifying, analyzing, negotiating, acquiring
and administering acquisitions of blocks of insurance business.
The team members, who have been involved with numerous
acquisitions, focus primarily on transactions involving the
purchase of blocks of policies, but also evaluate acquisitions of
entire companies. The Company's Management Information Systems
("MIS") and policyholder services departments are experienced in
converting the acquired policies and assuming the daily servicing
requirements related to the acquisition of substantial blocks of
policies. Significant progress was made by the Company in
upgrading its administrative systems, and efforts are continually
focused toward maintaining systems that can efficiently handle
sophisticated policies and contracts.
The Company believes that current trends in the life and
health insurance industry provide excellent opportunities for
more acquisitions and consolidations. Some companies are reducing
administrative costs by divesting of divisions, insurance
subsidiaries and blocks of business which do not fit their
overall strategies, or are disposing of non-core businesses in
order to focus capital on their primary lines. Other companies
are experiencing increased difficulty in remaining competitive
due to more stringent regulatory requirements, downgrades by
rating agencies, the increased cost of sophisticated information
processing systems and the inaccessibility to capital markets.
With its upgraded administrative systems, the Company is well-
positioned to assume blocks of business from insurers who do not
wish to bear the cost of becoming Year 2000 compliant with
respect to such blocks. Mutual companies and non-profit
entities, in particular, may have difficulty accessing sources of
capital. Additionally, there are many small to medium sized
closely held insurance companies which are exploring divestiture
options; the Company believes that it is well positioned to
compete for these opportunities.
Historical
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Madison Life acquired four individual life insurance blocks
during 1998 with total reserves of $41,500,000. One of the
blocks, with reserves of $250,000, was purchased from the
receiver of a liquidated company. A second block, with reserves
of $250,000, was purchased from a state insurance guaranty fund.
A third block, with reserves of $30,000,000, was purchased from
another state insurance guarantee fund. The fourth life block,
with reserves of $11,000,000 was purchased from an active company
exiting the individual life market. In connection with the
purchase of the credit insurance agency, Madison Life acquired a
block of credit life and disability policies with reserves of
$2,000,000.
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Madison Life acquired two single premium credit insurance
blocks and two individual life insurance blocks during 1997 with
aggregate reserves of $58,300,000. The two credit insurance
blocks had aggregate reserves of $31,600,000. One of the
individual life blocks was purchased from a company under court-
ordered liquidation and contained $23,000,000 of life/annuity
reserves and $300,000 of annual premiums. The other life block
was a single premium book of business with $3,400,000 of reserves
and was acquired from a company being merged into its parent
company. Finally, a very small block of life policies was
acquired from a state guaranty fund as part of Madison Life's
ongoing effort to maintain a positive relationship with
regulatory authorities in the event that significant blocks from
insolvent companies (such as the $23,000,000 block in 1997 and
the $30,000,000 block in 1998) become available in the future.
Madison Life acquired three blocks of business in 1996, with
aggregate reserves of $41,000,000, including a block of pre-need
individual ordinary life insurance and annuity policies with
reserves of $33,000,000 from a large insurer, and a block of
interest-sensitive whole life insurance with reserves of
$7,500,000 from the National Organization of Life and Health
Insurance Guaranty Associations ("NOLHGA").
Standard Life actively seeks acquisition opportunities with
other insurance companies (i) whose DBL business no longer fits
their marketing strategy or (ii) that cannot administer their in-
force DBL block profitably. As a result, Standard Life has
reduced its administration costs on a per policy basis and gained
access to new general agents and brokers. During 1997, Standard
Life acquired a DBL block of business with total annualized
premiums of $3,500,000. In 1996, Standard Life acquired two DBL
blocks from two insurers with total annualized premiums of
$3,500,000.
In January 1999, Standard Life acquired the life insurance
policies of a non-profit entity with reserves of $4,100,000. This
business will be administered through Madison Life's systems, and
may be partially reinsured to Madison Life.
Outlook
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The Company positioned itself to increase its acquisition
activity by contributing $5,000,000 to Madison Life in 1996
(following a contribution of $15,000,000 in 1993). These
contributions served to further enhance the Insurance Group's
already superior capital ratios, broad licensing and excellent
asset quality. The Company currently has no indebtedness, and
anticipates that it can use its current liquidity (including a
new $30,000,000 credit facility further described in Note 22 of
the Notes to Consolidated Financial Statements) and/or raise
additional capital in the public or private markets to the extent
determined necessary or desirable in order to pursue
acquisitions.
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The Company is particularly interested in acquiring the
following types of policies: traditional and group life, interest-
sensitive life, credit life and health, limited benefit health
(e.g., cancer or hospital indemnity), medical stop-loss, DBL,
certain other disability and certain annuities. The Company
believes that it enjoys an excellent reputation with state
guaranty funds and associated receivers in insolvency situations,
as evidenced by the number of such transactions Madison Life has
completed in the last several years. In addition, the Company
expects that additional opportunities may develop with non-profit
entities that are having difficulty administering their insurance
policies in an economically efficient manner, such as the block
acquired by Standard Life in 1999.
REINSURANCE AND POLICY RETENTION LIMITS
Although the Company has more than sufficient capital to
retain greater risk, it has emphasized, in recent years,
maintaining a low risk profile on its insurance products, while
increasing fee income and reinsurance allowances generated by
underwriting, auditing, marketing, regulatory, administrative and
related services. During the past three years, such income and
allowances have grown as a result of an increase in the Company's
premium volume. The Company's low risk profile dictates
purchasing reinsurance and excess reinsurance. The Company
monitors its retention amounts by products, and can and does
adjust its retention as appropriate.
Reinsurance is used to reduce the potentially adverse
financial impact of large individual or group risks, and to
reduce the strain on statutory income and surplus related to new
business. By using reinsurance, the Insurance Group is able to
write policies in amounts larger than it could otherwise accept.
The amount reinsured is the portion of each policy in excess of
the retention limit on a particular policy. Retention limits for
Standard Life at December 31, 1998 were: (i) $210,000 per life on
individual life and corresponding disability waiver of premium;
(ii) no retention on accidental death benefits provided by rider
to individual life policies; (iii) $250,000 on any one medical
stop-loss claim; (iv) $2,500 of monthly benefits on disability
income policies; and (v) $25,000 on its special disability
business. Standard Life has purchased excess reinsurance for its
medical stop-loss business on the portion of risks which it
retains in order to further limit its exposure. Standard Life
also maintains stop-loss and catastrophe reinsurance in order to
protect against particularly adverse mortality which might occur
with respect to its overall life business.
At December 31, 1998, retention limits for Madison Life
were: (i) $2,500 per month on group long-term and short-term
disability insurance; (ii) $60,000 on group term life,
substandard ordinary life, group credit single premium life,
group family life and individual ordinary life; (iii) $1,000 per
month on individual substandard long-term disability insurance;
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(iv) $1,000 per month on credit single premium disability
insurance; and (v) $1,000 monthly benefit on individual accident
and health insurance. There is no retention on accidental death
benefits provided by rider to group life policies. In addition,
Madison Life has purchased additional reinsurance on the portion
of risks which it retains, limiting its exposure on a
catastrophic (aggregate) loss.
The following reinsurers represent 60.5% of the total ceded
premium for the year ended December 31, 1998:
Phoenix Home Life Insurance Company 11.6%
Continental Assurance Company 10.9%
ReliaStar Life Insurance Co., Inc. 10.2%
Cologne Life Reinsurance Company 7.6%
Vasa North Atlantic Insurance Company 7.2%
Swiss Reinsurance Life and Health 6.5%
General Reinsurance Corp. 6.5%
-----
60.5%
=====
The Insurance Group remains liable with respect to the
insurance in-force which has been reinsured in the unlikely event
that the assuming reinsurers are unable to satisfy their
obligations. The Insurance Group cedes business (i) to individual
reinsurance companies and reinsurance pools comprised of
companies that are primarily rated A or better by Best or (ii)
upon provision of adequate security. The ceding of reinsurance
does not discharge the primary liability of the original insurer
to the insured. Since the risks under the Insurance Group's
business are primarily short-term, there would be limited
exposure as a result of a change in a reinsurer's
creditworthiness during the term of the reinsurance. At December
31, 1998 and 1997, the Insurance Group's ceded reinsurance in-
force was $2.8 billion and $2.4 billion, respectively.
For further information pertaining to reinsurance, reference
is made to Note 17 of Notes to Consolidated Financial Statements.
RESERVES AND INVESTMENTS
More than 88% of IHC's securities portfolio is managed by
employees of IHC and its affiliates, and ultimate investment
authority rests with IHC's in-house investment group. As a result
of the nature of IHC's insurance liabilities, IHC endeavors to
maintain a significant percentage of its assets in investment
grade securities, cash and cash equivalents. At December 31,
1998, approximately 98% of the fixed maturities were investment
grade and only a negligible amount were in real estate, non-
performing fixed maturities and mortgage loans. The internal
investment group provides a summary of the investment portfolio
and the results thereof at the meetings of the Board of
Directors.
-14-
<PAGE>
As required by insurance laws and regulations, the Insurance
Group establishes reserves to meet obligations on policies in-
force. These reserves are amounts which, with additions from
premiums expected to be received and with interest on such
reserves at certain assumed rates, are calculated to be
sufficient to meet anticipated future policy obligations.
Premiums and reserves are based upon certain assumptions with
respect to mortality, morbidity on health insurance, lapses and
interest rates effective at the time the polices are issued. The
Insurance Group also establishes appropriate reserves for
substandard business, annuities and additional policy benefits,
such as waiver of premium and accidental death. Standard Life
and Madison Life are also required by law to periodically have a
cash flow adequacy analysis, which projects the amount and timing
of cash flows to the estimated maturity date of liabilities,
prepared by the certifying actuary for each insurance company.
Standard Life, Madison Life and First Standard invest their
respective assets, which support the reserves and other funds in
accordance with applicable insurance law, under the supervision
of their respective Boards of Directors. The Company manages
interest rate risk seeking to maintain a portfolio with a
duration and average life that falls within the band of the
duration and average life of the applicable liabilities. The
Company utilizes options to modify the duration and average life
of the assets. Such investment strategies are further described
in Note 1(G)(iv) of the Notes to Consolidated Financial
Statements.
Under Wisconsin insurance law, there are restrictions
relating to the percentage of an insurer's admitted assets that
may be invested in a specific issuer or in the aggregate in a
particular type of investment. With respect to the portion of an
insurer's assets equal to its liabilities plus a statutorily-
determined security surplus amount, a Wisconsin insurer cannot,
for example, invest more than a certain percentage of its assets
in non-amortizable evidences of indebtedness, securities of any
one person (other than its subsidiary and the United States
government), or common stock of any corporation and its
affiliates (other than its subsidiary).
Under New York insurance law, there are restrictions
relating to the amount of an insurer's admitted assets that may
be invested in a specific issuer or in the aggregate in a
particular type of investment. For example, a New York insurer
cannot invest more than a certain percentage of its admitted
assets in common or preferred shares of any one institution,
obligations secured by any one property (other than those issued,
guaranteed or insured by the United States or any state
government or agency thereof), or medium and lower grade
obligations. In addition, there are certain qualitative
investment restrictions.
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<PAGE>
Under Delaware insurance law, there are restrictions
relating to the percentage of an insurer's admitted assets that
may be invested in a specific issuer or in the aggregate in a
particular type of investment. In addition, there are qualitative
investment restrictions.
The following table reflects the asset value in dollars (in
thousands) and as a percentage of total investments of the
Company as at December 31, 1998:
INVESTMENTS BY TYPE
- ------------------- % OF TOTAL
ASSET VALUE INVESTMENTS
Fixed maturities: ------------------------------
Bonds:
United States Government
and authorities...................$174,529 53.5%
States, municipalities and
political subdivisions............ 2,294 0.7%
Public utilities................... 31,511 9.7%
All other corporate securities..... 11,696 3.6%
------- ----
Total fixed income securities...... 220,030 67.5%
------- ----
Equity securities:
Common stocks:
Industrial, miscellaneous
and other......................... 12,660 3.9%
Non-redeemable preferred stock..... 4,344 1.3%
------- ----
Total equity securities............ 17,004 5.2%
------- ----
Financial investments sold,
but not yet purchased:
Common stocks:
Industrial, miscellaneous
and other......................... (458) (0.1)%
------- ----
Securities purchased under
agreements to resell............... 11,681 3.6%
Partnership interests............... 37,310 11.5%
Mortgage loans...................... 245 0.1%
Policy loans........................ 12,390 3.8%
Other............................... 2,246 0.7%
Short-term investments, net......... 25,250 7.7%
------- -----
Total investments, net.............$325,698 100.0%
======= =====
At December 31, 1998, 97.6% of the Company's fixed
maturities were investment grade. The composition of the
Company's fixed maturities at December 31, 1998, utilizing
Standard and Poor's rating categories, was as follows:
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<PAGE>
GRADE % INVESTED
----- ----------
AAA 79.7%
AA 12.9%
A 2.2%
BBB 2.8%
BB or lower 2.4%
-----
100.0%
=====
The Company's total pre-tax investment results for each of
the last three years were as follows:
1998 1997 1996
Consolidated Statement ---- ---- ----
of Operations
Net investment income $21,624,000 $21,534,000 $16,917,000
Net realized and
unrealized gains 2,013,000 539,000 190,000
Consolidated Balance Sheet
Net unrealized gains
(losses) 1,761,000 4,894,000 (2,774,000)
---------- ---------- ----------
Total pretax
investment results $25,398,000 $26,967,000 $14,333,000
========== ========== ==========
COMPETITION AND REGULATION
The Company competes with many larger insurance companies,
HMOs and other managed care organizations. Although most life
insurance companies are stock companies, mutual companies also
write life insurance in the United States. Mutual companies may
have certain competitive advantages since profits inure directly
to the benefit of the policyholders. HMOs may also have certain
competitive advantages since they are subject to different
regulations than insurance companies. As more companies enter
the acquisition field, the Company faces increased competition
for future acquisitions.
IHC is an insurance holding company; as such, IHC and the
Insurance Group are subject to regulation and supervision by the
insurance supervisory agencies of New York in the case of
Standard Life, Wisconsin in the case of Madison Life, and
Delaware in the case of First Standard. Each of Standard Life,
Madison Life and First Standard is also subject to regulation and
supervision in all jurisdictions in which it is licensed to
transact business. These supervisory agencies have broad
administrative powers with respect to the granting and revocation
of licenses to transact business, the licensing of agents, the
approval of policy forms, the approval of commission rates, the
form and content of mandatory financial statements, reserve
requirements and the types and maximum amounts of investments
which may be made. Such regulation is designed primarily for the
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<PAGE>
benefit of policyholders rather than the stockholders of an
insurance company or holding company.
Certain transactions within the holding company system are
also subject to regulation and supervision by such regulatory
agencies. All such transactions must be fair and equitable.
Notice to or prior approval by the insurance department is
required with respect to transactions affecting the ownership or
control of an insurer and of certain material transactions,
including dividend declarations, between an insurer and any
person in its holding company system. Under Delaware, New York
and Wisconsin insurance laws, "control" is defined as the
possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a person.
Under Delaware and New York laws, control is presumed to exist if
any person, directly or indirectly, owns, controls or holds with
the power to vote ten percent or more of the voting securities of
any other person; in Wisconsin, the presumption relates to more
than ten percent of the voting securities of another person.
Under Delaware and New York laws, an agreement to acquire control
of an insurer domiciled in one of those states must be approved
by the Commissioner of Insurance of that state. Under Wisconsin
law, the Commissioner of Insurance has the right to disapprove an
agreement to acquire control of a Wisconsin-domiciled insurer. In
addition, periodic disclosure is required concerning the
operations, management and financial condition of the insurer
within the holding company system. An insurer is also required to
file detailed annual statements with each supervisory agency, and
its affairs and financial conditions are subject to periodic
examination. See Note 19 of Notes to Consolidated Financial
Statements for information as to restrictions on the ability of
IHC's insurance subsidiaries to pay dividends.
Risk-based capital requirements are imposed on life and
property and casualty insurance companies. The risk-based capital
ratio is determined by dividing an insurance company's total
adjusted capital, as defined, by its authorized control level
risk-based capital. Companies that do not meet certain minimum
standards require specified corrective action. The risk-based
capital ratios for each of Standard Life, Madison Life and First
Standard significantly exceed such minimum ratios.
EMPLOYEES
At December 31, 1998, the Company had 144 employees.
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<PAGE>
ITEM 2. PROPERTIES
----------
IHC
IHC has entered into a renewable short-term arrangement with
Geneve Corporation for the use of 6,750 square feet of office
space as its corporate headquarters in Stamford, Connecticut.
Standard Life
Standard Life leases 13,500 square feet of office space in
New York, New York as its corporate headquarters, and 3,000
square feet of office space in Farmington, New York for its DBL
claims processing center.
Madison Life
Madison Life leases 12,000 square feet of office space in
Middleton, Wisconsin as its corporate headquarters.
IndependenceCare
IndependenceCare leases 1,500 square feet of office space in
Minneapolis, Minnesota as its corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company knows of no material pending legal proceedings
to which it is a party or of which any of its property is the
subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
-------------------------------------------------
STOCKHOLDER MATTERS
-------------------
IHC's common stock and share purchase warrants expiring June
30, 2001 ("Warrants") are traded over-the-counter. The common
stock trades on the Nasdaq National Market tier of the Nasdaq
Stock Market under the symbol INHO. Warrant prices are quoted on
the OTC Bulletin Board. The following tabulation shows the high
and low sales prices for IHC's common stock and the high and low
bid prices for the Warrants. The Warrant information was obtained
from the National Quotation Bureau.
COMMON STOCK WARRANTS
------------ -----------
HIGH LOW HIGH LOW
---- --- ---- ---
QUARTER ENDED:
December 31, 1998....... 14 12 1 1/4 1 1/4
September 30, 1998...... 14 3/4 11 1/2 1 5/8 1 1/4
June 30, 1998........... 18 1/8 12 7/8 2 1 1/64
March 31, 1998.......... 15 3/4 11 7/8 1 1/64 1/4
QUARTER ENDED:
December 31, 1997....... 14 11 1/4 1/32
September 30, 1997...... 13 1/2 9 1/4 1/32 1/32
June 30, 1997........... 10 1/4 6 3/8 1/32 1/32
March 31, 1997.......... 8 1/8 7 1/32 1/32
The foregoing prices for the Warrants do not necessarily
represent actual transactions, but rather the quoted prices
between dealers, excluding retail markup, markdown or commission.
At February 22, 1999, the number of record holders of IHC's
(i) common stock was 2,780 and (ii) Warrants was 1,236.
IHC declared a cash dividend of $.05 per share on its common
stock on each of November 16, 1998 and December 30, 1997.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following is a summary of selected consolidated financial data of
the Company for each of the last five years.
YEAR ENDED DECEMBER 31,
1998 1997 1996 1995 1994
----------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME DATA:
Total revenues.............$110,614 $106,757 $ 89,344 $ 71,427 $ 61,504
Net realized and
unrealized gains (losses). 2,013 539 190 - (1,921)
Income applicable to
common shares from
continuing operations..... 11,057 11,187 6,710 6,172 2,396
Operating income excluding
net realized and
unrealized gains.......... 12,397 11,703(1) 6,630 4,772 3,594
BALANCE SHEET DATA:
Total investments.......... 326,156 309,013 249,008 185,867 179,856
Total assets............... 500,312 454,738 336,401 286,207 266,368
Future insurance policy
benefits, claims and other
policy liabilities........ 328,491 278,092 202,278 158,233 150,988
Long-term debt............. - - - 12,111 14,111
Common stockholders' equity 109,527 91,005 76,856 71,607 55,694
PER SHARE DATA:
Cash dividends declared
per common share.......... .05 .05 .05 .04 .04
Basic income per common
share from continuing
operations................ 1.49 1.51 .90 .81 .31
Diluted income per
common share from
continuing operations..... 1.47 1.49 .90 .81 .31
Book value per common share 14.87 12.25 10.34 9.63 7.17
(1) Also excludes the $1,046,000 gain from the sale of real estate in 1997.
The above table has been restated to reflect (i) the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," (ii) Zimmerman as discontinued operations as described in Note 2 of
Notes to Consolidated Financial Statements and (iii) the one-for-two reverse
stock split of IHC's common stock effective June 28, 1996.
The Selected Financial Data should be read in conjunction with the
accompanying Consolidated Financial Statements and Notes thereto.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Independence Holding Company, a Delaware corporation
("IHC"), is a holding company engaged principally in the life and
health insurance business through its wholly-owned subsidiaries,
Standard Security Life Insurance Company of New York ("Standard
Life"), Madison National Life Insurance Company, Inc. ("Madison
Life") and First Standard Security Insurance Company ("First
Standard") and their subsidiaries (collectively, the "Insurance
Group"). IHC and its subsidiaries (including the Insurance
Group) are collectively referred to as the "Company." All
remaining income, principally income from parent company
liquidity (cash, cash equivalents, resale agreements, fixed
maturities and equity securities and partnership interests) 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 (see Item 1
for a discussion of the business).
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC's common stock as of
December 20, 1996. Since December 1995, the Consolidated
Financial Statements of the Company have presented Zimmerman as
discontinued operations (see Notes 2 and 10 of Notes to
Consolidated Financial Statements).
Additional information pertaining to the Company's business
segments is provided in Note 18 of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
---------------------
1998 COMPARED TO 1997
- ---------------------
The Company's operating income increased $1.1 million to
$14.4 million for the year ended December 31, 1998 from $13.3
million for the same period in 1997. Net income was $11.1
million, or $1.47 per share, diluted, for the year ended December
31, 1998 compared to $11.2 million, or $1.49 per share, diluted,
for the year ended December 31, 1997. The Company had net
realized and unrealized gains of $2.0 million in 1998 and $.5
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. Additionally, the 1997 results includes a 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 and the
real estate gain, the Company had operating income of $12.4
million in 1998 as compared to $11.8 million in 1997, an increase
of $.6 million, which approximately consists of: an increase in
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<PAGE>
acquisitions at Madison Life of $.9 million and an increase due
to all other lines of business of $1.9 million, offset by a
decrease in yields on investable assets of $2.2 million. Income
tax expense increased $1.3 million to $3.4 million in 1998 from
$2.1 million in 1997 reflecting a higher effective income tax
rate in 1998, principally due to reduced benefits associated with
the utilization of the Company's remaining tax loss carryforwards
(see Capital Resources).
Insurance Group
- ---------------
The Insurance Group's operating income increased $2.2
million to $15.0 million in 1998 from $12.8 million in 1997.
Operating income includes net realized and unrealized gains of
$2.1 million in 1998 compared to $.5 million in 1997. Operating
income (excluding net realized and unrealized gains) was $12.9
million in 1998 compared to $12.3 million in 1997, an increase of
5.5%.
Premiums earned decreased $1.5 million to $80.7 million in
1998 from $82.2 million in 1997; premiums earned increased $4.5
million at Madison Life and decreased $6.0 million at Standard
Life. The increase at Madison Life is comprised of: a $2.3
million increase in the credit lines of business primarily due to
the acquisition of two single premium blocks of business
effective April 1 and October 1, 1997, the full impact of which
is reflected in the 1998 results; a $.7 million increase in long-
term disability premiums due to higher sales volume; a $1.6
million increase in the ordinary life and individual accident and
health lines of business due to acquisitions effective December
31, 1997 and June 1, 1998; a $.3 million increase in group term
life; and a $.2 million increase in other group life and accident
and health premiums; the foregoing is offset by a $.6 million
decrease in dental premiums due to the runoff of this line of
business. The change at Standard Life is comprised of: a $1.0
million decrease in its DBL line due to a higher lapse rate in
1998; a $2.8 million decrease in HMO premiums due to a
reinsurance adjustment on an assumed block of business; a $1.9
million decrease in POS premiums due to the loss of one large
policy contract in 1998; and a $.9 million decrease in its closed
blocks of life, annuity and individual group accident and health
lines of business that are in runoff; offset by a $.6 million
increase in group life as a result of increased production in
this line of business.
Total net investment income increased $.3 million primarily
due to the increase in assets at Madison Life related to
acquisitions, offset by lower returns on certain hedged equity
and distressed situation investments in 1998. The annualized
return on investments of the Insurance Group in 1998 was 6.4%
compared to 7.6% in 1997.
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<PAGE>
Other income increased $4.8 million. Madison Life had an
increase of $2.8 million due to fee income earned by the managing
general underwriter ("MGU") in which Madison Life acquired a
controlling interest effective December 31, 1997; such fee income
was offset by expenses described below in general and
administrative expenses. Other income at Standard Life increased
$2.0 million due to an increase in coinsurance reserves of $2.1
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, and an increase of $.8 million
in POS fee income; the foregoing was offset by a $.9 million
decrease in fee income from the third party administrator ("TPA")
in which Standard Life sold its interest in December 1997. Equity
income from insurance related partnerships decreased $.2 million.
Insurance benefits, claims and reserves increased $1.1
million reflecting an increase of $5.1 million at Madison Life
and a decrease of $4.0 million at Standard Life. Madison Life's
increase results from: a $1.9 million increase in the credit
lines of business due to the 1997 acquisitions described above; a
$2.8 million expected increase in surrenders on its new blocks of
business; a $.4 million increase in ordinary life and individual
accident and health claims and reserves due to acquisitions; and
a $.4 million increase in group term life claims; the foregoing
was offset by a $.4 million decrease in dental claims due to a
decrease in premiums from this line of business. The change at
Standard Life is comprised of: a $2.7 million decrease in HMO
reserves due to a reinsurance adjustment on an assumed block of
business; a $4.0 million decrease in additional DBL claims and
reserves due to improved experience ($3.4 million) and lower
premiums ($.6 million); a $1.0 million decrease in POS claims and
reserves due to a retroactive adjustment and the loss of one
large policy contract in 1998; a $.6 million decrease in reserves
on the runoff pool of accident and health business. The foregoing
were partially offset by: a $1.9 million increase in reserves in
the closed blocks of life, annuity and individual and group
accident and health lines of business; a $2.0 million increase in
stop-loss reserves due to higher claims experience; a $.1 million
increase in dividends to policyholders; and a $.3 million
increase in group life claims and reserves.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $1.7 million. Madison Life's expenses increased $4.5
million and Standard Life's expenses decreased $2.8 million. The
increase at Madison Life is primarily due to an increase in other
general expenses of $3.4 million related to the MGU; an increase
in commissions of $.6 million related to the acquisition of new
blocks of business in 1997 and 1998; a $.2 million increase in
premium taxes; and $.3 million increase in other expenses related
to the increase in business. The decrease at Standard Life is
primarily due to a reduction in net commission expense of $1.7
million attributable to the increase in expense allowances
received from reinsurers on its HMO and special disability lines
-24-
<PAGE>
of business as a result of the increase in gross premiums and a
$1.1 million decrease in general expenses from the TPA.
Corporate
- ---------
Operating income for the year ended December 31, 1998
decreased $1.1 million to a loss of $.6 million as compared to
income of $.5 million for the year ended December 31, 1997.
Operating income includes realized and unrealized losses of $.1
million in 1998. Included in the 1997 results of Corporate is the
$1.0 million gain from the real estate sale. Excluding realized
and unrealized gains and the real estate gain, Corporate had a
loss of $.5 million in both 1998 and 1997. Investment income
decreased $.2 million from 1997 due to lower returns on certain
hedged equity investments in 1998. Other income increased $.2
million as a result of fee income earned from the termination of
the guarantee of certain subordinated indebtedness of Zimmerman.
Selling, general and administrative expenses remained constant.
RESULTS OF OPERATIONS
---------------------
1997 COMPARED TO 1996
- ---------------------
The Company's operating income from continuing operations
increased $6.5 million, or 95%, to $13.3 million in 1997 from
$6.8 million in 1996. The Company had net realized and unrealized
gains of $.5 million in 1997 and $.2 million in 1996.
Additionally, the 1997 results include the gain on sale of real
estate of $1.0 million. Excluding net realized and unrealized
gains and the real estate gain, the Company had operating income
from continuing operations of $11.8 million in 1997 compared to
$6.6 million for 1996. The overall increase in operating income
approximately consists of: acquisitions made at Madison Life of
$1.5 million, the increase in yields on investable assets of $1.8
million, and the continued growth of the Insurance Group and all
other of $1.9 million. Net income was $11.2 million or $1.49 per
share, diluted, for the year ended December 31, 1997 compared to
$7.8 million or $1.04 per share, diluted, for the year ended
December 31, 1996. Income tax expense increased to $2.1 million
from $.1 million in 1996; reference is made to Note 15 of Notes
to Consolidated Financial Statements for a reconciliation of the
effective tax rate.
Insurance Group
- ---------------
The Insurance Group's operating income increased $12.8
million in 1997 from $10.0 million in 1996. Operating income
includes net realized and unrealized gains of $.5 million in 1997
compared to $.2 million in 1996. Operating income excluding net
realized and unrealized gains was $12.3 million in 1997 compared
to $9.8 million in 1996.
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<PAGE>
Premium revenues increased $12.6 million to $82.2 million in
1997 from $69.6 million in 1996; premium revenues at Madison Life
increased $7.8 million while Standard Life showed a $4.8 million
increase in premiums. The increase at Madison Life is comprised
of: a $6.4 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; a $.7 million increase
in dental premiums; and a $.2 million increase in group term life
premiums. The increase at Standard Life is comprised of: a $5.3
million increase in its DBL line of business primarily due to an
acquisition and the continued growth in this line; a $.8 million
increase in HMO reinsurance business; and a $.4 million combined
increase in the provider-excess and special disability
businesses. These increases were offset by a $1.1 million
decrease in the closed blocks of life, annuity and individual and
group accident and health lines of business and a $.6 million
decrease in the medical stop-loss line of business.
Total net investment income increased $3.7 million due to an
increase in assets at Madison Life related to acquisitions and
higher returns on certain hedged equity investments. The
annualized return on investments in 1997 was 7.6% compared to
7.2% in 1996. Equity income increased $.4 million due to the
increased profitability of certain insurance related
partnerships.
Other income decreased $1.6 million from 1996 to 1997
resulting from: a decrease of $.1 million in reinsurance
recoveries at Madison Life; and a decrease at Standard Life of
$1.5 million. The decrease at Standard Life is the result of a
$2.1 million decrease related to the surrender by a large group
of policyholders offset by a credit to reserves relating to the
closed blocks of life, annuity and individual and group accident
and health lines of business; a $.3 million increase related to
administrative fees; and a $.2 million increase related to an
increase in POS activity.
Insurance benefits, claims and reserves increased $8.8
million reflecting an increase of $5.4 million at Madison Life
and $3.4 million at Standard Life. Madison Life's increase
resulted from: a $.5 million increase in long-term disability
claims; a $.9 million increase in dental claims due to the
increase in premium volume; a $.9 million increase in interest
credited to universal life and annuity products; a $3.0 million
increase in the credit line of business due to acquisitions and
the addition of new accounts throughout the current year; and a
$.4 million increase in other life and health lines of business,
all of the foregoing offset by a $.3 million decrease in ordinary
life and individual accident and health claims and reserves. The
change at Standard Life is comprised of: a $3.6 million increase
in DBL claims and reserves due to increased volume; a $2.0
million increase in medical stop-loss reserves due to reserve
strengthening; and a net $.8 million increase in claims and
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<PAGE>
reserves in the HMO reinsurance line of business. Such change was
offset by a $2.9 million decrease in claims and reserves of the
closed blocks of life, annuity and individual and group accident
and health lines of business due to the surrender by a large
group of policyholders in a coinsurance treaty and a $.1 million
decrease in POS claims and reserves.
Amortization of deferred acquisition costs and general and
administrative expenses increased $3.7 million at Madison Life
and $.1 million at Standard Life primarily due to increases in
net commission expense of $2.3 million, salary and related
expenses of $.7 million and other general expenses of $.8 million
related to the increase in premium volume at both insurance
companies, and the acquisition of new blocks of business at
Madison Life.
Corporate
- ---------
Operating income for the year ended December 31, 1997
increased by $3.7 million to $.5 million in 1997 from a loss of
$3.2 million in 1996. Included in the 1997 results is the real
estate gain of $1.0 million. Excluding the real estate gain in
1997, Corporate had an increase in operating income of $2.7
million. Investment income increased $1.0 million due to higher
corporate liquidity in 1997. Interest expense decreased $.7
million due to the repayment of all long-term debt during 1996.
Selling, general and administrative expenses decreased $1.0
million due to a reduction in expenses related to salaries, legal
fees and the Florida real estate.
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 and short-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 84.2% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at December 31, 1998. Also at such
date, approximately 97.6% of the Company's fixed maturities were
investment grade. These investments carry less risk and,
therefore, lower interest rates than other types of fixed
-27-
<PAGE>
maturity investments. At December 31, 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
Company's total investments were in real estate and mortgage
loans. The Company has no non-performing fixed maturities.
Risk Management
The Company manages interest rate risk by seeking to
maintain a portfolio with a duration and average life that falls
within the band of the duration and average life of the
applicable liabilities, and may utilize options to modify the
duration and average life of such assets; see Note 1(G)(iv) of
Notes to Consolidated Financial Statements.
The following summarizes the estimated pre-tax change in
fair value (based upon hypothetical parallel shifts in the U.S.
Treasury yield curve) of the fixed income portfolio assuming
immediate changes in interest rates at specified levels at
December 31, 1998:
Estimated
Estimated Change in
Change in Interest Rates Fair Value Fair Value
- ------------------------ ---------- ----------
(in millions)
100 basis point rise $209 ($11)
Base scenario 220 -
100 basis point decline 228 8
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.
This monitoring includes the maintenance of an asset-liability
model that matches current insurance liability cash flows with
current investment cash flows. This is accomplished by first
creating an insurance model of the Company's in-force policies
using current assumptions on mortality, lapses and expenses.
Then, current investments are assigned to specific insurance
blocks in the model using appropriate prepayment schedules and
future reinvestment patterns. The results of the model specify
whether the investments and their related cash flows can support
the related current insurance cash flows. Additionally, various
scenarios are developed changing interest rates and other related
assumptions. These scenarios help evaluate the market risk due to
changing interest rates in relation to the business of the
Insurance Group.
In the Company's analysis of the asset-liability model, a
100 basis point change in interest rates on the Insurance Group's
liabilities would not be expected to have a material adverse
effect on the Company. With respect to its liabilities, if
-28-
<PAGE>
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 policies of continuing companies. Additionally, there
are charges to help offset the benefits being surrendered. If
interest rates were to decrease substantially, the risk to the
Company is that some of its investment assets would be subject to
early redemption. This is not a material exposure because the
Company would have additional gains in its portfolio to help
offset the future reduction of investment income. With respect to
its investments, the Company employs (from time to time as
warranted) investment strategies to mitigate interest rate and
other market exposures.
Balance Sheet
The decrease in cash and cash equivalents and securities
purchased under agreements to resell from December 31, 1997 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 special disability business of which a large
portion is reinsured. The increase in future policy liabilities
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 10 of Notes to Consolidated Financial Statements).
The Company had net receivables from reinsurers of $114.1
million at December 31, 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 December 31, 1998.
Corporate
- ---------
Corporate derives its funds principally from: (i) dividends
and interest income from the Insurance Group; (ii) management
fees from its subsidiaries; and (iii) investment income from
-29-
<PAGE>
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.
Total Corporate liquidity (cash, cash equivalents, resale
agreements, fixed maturities, equity securities and partnership
interests) amounted to $17.6 million at December 31, 1998.
During 1998, IHC repurchased 68,669 shares of common stock for
$.9 million under a repurchase program initiated in 1991.
OUTLOOK
Business
- --------
The Company anticipates increasing its premium volume
through: (i) acquisitions; (ii) greater geographical diversity;
(iii) expansion of its network of MGUs, MGAs, HMOs, general
agents and agents; and (iv) investments in affiliated marketing
subsidiaries. The Company is particularly interested in acquiring
the following types of policies: traditional and group life,
interest sensitive life, credit life and health, limited benefit
health (e.g., cancer or hospital indemnity), medical stop-loss,
DBL blocks, and certain other disability. In anticipation of
increased acquisition opportunities, the Company significantly
improved its administration systems commencing in the latter part
of 1996, which has enabled it to more efficiently convert and
manage acquired blocks. It is anticipated that future
acquisitions will be funded internally from existing capital and
surplus and parent company liquidity, including a new $30.0
million credit facility (see Note 22 of Notes to Consolidated
Financial Statements).
Although federal and state legislative and regulatory bodies
have proposed various health care and insurance reform
initiatives in recent years (see Item 1. Business), the Company
anticipates that its insurance products will continue to be
viable in any such changed environment.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four digits to define the
applicable year. If not corrected, computer applications could
fail or create erroneous results by or at the Year 2000. The
Company, together with outside vendors engaged by the Company,
has made assessments of the Company's potential Year 2000
exposure, and has begun testing all of the Company's systems.
Since the Company has spent in excess of $1.3 million to update
and enhance many of its primary systems in the past several
years, the Company does not believe that the Year 2000 issue will
pose internal operational difficulties. Many of the Company's
internal software and hardware have already been tested and are
compliant, and the Company expects that all internal systems will
-30-
<PAGE>
be Year 2000 compliant prior to June 30, 1999. 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 MGUs, MGAs, HMOs, agents, TPAs, producers, reinsurers,
securities brokers and bankers. The Company has requested
information from these third parties and is continuing to monitor
their responses and evaluate any possible impact on the Company.
All of Standard Life's medical stop-loss and group life MGU's
have represented that they are or will be Year 2000 compliant by
December 31, 1999 and Madison Life's largest MGA for group life
and long-term disability has indicated that it will be compliant
by June 30, 1999. Standard Life has required that its MGUs obtain
Year 2000 compliance certifications from, and has supplied the
MGUs with questionnaires to be completed by, TPAs and producers
with whom they place business. In addition, the U.S. Senate
Special Committee on the Year 2000 Technology Problem determined
that the healthcare industry lags in its progress towards Year
2000 preparedness. In particular, the Committee cited concerns
over the preparedness of large, rural and inner-city hospitals,
and doctor's offices, the availability of pharmaceuticals and the
preparedness of health claim billing systems.
The Company is in the development stages of formulating a
contingency plan with respect to this exposure. With respect to
functions performed internally by the Company, if one of the
Company's systems is not compliant, the Company could resort to
manual collection of premiums and processing of claims, or could
temporarily transfer these functions to affiliated or
unaffiliated entities. With respect to functions currently
performed externally, the Company could consider temporarily
performing these functions internally, or transferring the
functions to another of the Company's vendors that is Year 2000
compliant.
The dates of expected completion and the costs of the
Company's Year 2000 remediation efforts are based on management's
estimates, which were derived utilizing assumptions of future
events, including the availability of certain resources, third
party remediation plans and other factors. There can be no
guarantee that these expectations will be achieved; if the actual
timing and costs for the Company's Year 2000 compliance program
differ materially from those anticipated, the Company's financial
results and financial condition could be significantly affected.
Additionally, despite testing by the Company, the Company's
systems may contain undetected errors or defects associated with
Year 2000 date functions. The inability of the Company to
correctly identify significant Year 2000 issues for remediation
or to complete its Year 2000 remediation and testing efforts
prior to respective critical dates, as well as the failure of
third parties (with whom the Company has an important
relationship) to identify, remediate and test their own Year 2000
-31-
<PAGE>
issues and the resulting disruption which could occur in the
Company's systems, could have material adverse effects on the
Company's business, results of operations, cash flows and
financial condition.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999. SFAS No. 133
establishes standards for accounting and reporting for derivative
instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities
in the balance sheet and measures those instruments at fair
value. The Company is evaluating the statement but does not
expect it to have a material impact on the Company.
This report and other reports and statements filed by the
Company with the Securities and Exchange Commission contain or
may contain certain forward looking statements (as that term is
defined in the Private Securities Litigation Reform Act of 1995)
which are subject to certain risks and uncertainties. Among
those factors which could cause the actual results to differ
materially from those suggested by such statements are the
following: catastrophic losses in the Company's insurance lines
or a material aggregation of losses; changes in federal or state
law affecting the Company's insurance products; Year 2000 non-
compliance by material vendors; availability of adequate
retrocessional insurance coverage at appropriate prices; stock
and bond market volatility; the effect of changes required by
generally accepted accounting practices or statutory accounting
practices; and other risks which are described from time to time
in the Company's filings with the Securities and Exchange
Commission.
CAPITAL RESOURCES
Due to its superior capital ratios, broad licensing and
excellent asset quality and credit-worthiness, the Insurance
Group remains well positioned to increase or diversify its
current activities, and to raise additional capital in the public
or private markets to the extent determined to be necessary or
desirable, in order to pursue acquisitions or otherwise expand
its operations.
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.
In accordance with 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
-32-
<PAGE>
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 taxes
of $.4 million and net of deferred policy acquisition costs of
$.6 million in total stockholders' equity, reflecting unrealized
gains of $2.6 million at December 31, 1998 versus unrealized
gains of $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 1998 reflect a higher effective tax rate than
in 1997 due to reduced benefits associated with the utilization
of net operating loss carryforwards. As previously reported, the
Company expects that its future results will reflect a higher
effective tax rate.
DISTRIBUTION OF ZIMMERMAN
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman on a pro rata basis to holders of
record of IHC's common stock as of December 20, 1996.
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman Common Stock for each five
shares of IHC Common Stock, and cash in lieu of fractional
shares. IHC received a ruling from the Internal Revenue Service
that the distribution would be tax-free to IHC shareholders, and
that IHC would not recognize income, gain or loss as a result of
the transaction.
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33.0 million, of which $10.0 million consisted of
subordinated debt guaranteed by a subsidiary of IHC. The
proceeds of borrowings by Zimmerman under such arrangements were
used, among other things, to repay all of its prior outstanding
indebtedness and to pay a $19.7 million special cash dividend to
its shareholders. From its $18.5 million portion of the special
dividend, the Company repaid all of its $10.0 million of
indebtedness, contributed $5.0 million to Madison Life in
exchange for a surplus note and used the balance for working
capital. Expenses of $1.1 million in connection with the
distribution transaction are recorded in discontinued operations,
net, on the Consolidated Statement of Operations.
On September 30, 1998, the guarantee of $10.0 million of
Zimmerman debt was terminated; accordingly, the deferred credit
(which was incurred in connection with the spin-off of Zimmerman)
of $7.9 million, or $1.06 per share, was credited to
stockholders' equity as of September 30, 1998.
-33-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
---------------------------------------------------------------
RISK
----
See Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See Index to Consolidated Financial Statements and Schedules
on page 38.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information required by this Item is incorporated by
reference to "Election of Directors" and "Executive
Officers" in the Company's Proxy Statement for its 1999
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required by this Item is incorporated by
reference to "Executive Compensation" in the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders,
except that the information required by paragraphs (i), (k)
and (l) of Item 402 Regulation S-K (229.402) and set forth
in such Proxy Statement is specifically not incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders.
-34-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required by this Item is incorporated by
reference to "Principal Stockholders" in the Company's Proxy
Statement for its 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
-------------------------------------------------------
FORM 8-K
--------
(a) (1) and (2) See Index to Consolidated Financial Statements
and Schedules on page 38.
(b) (3) EXHIBITS See Index to Exhibits on page 82.
A report on Form 8-K was filed on January 10, 1998.
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d)
of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 25, 1999.
INDEPENDENCE HOLDING COMPANY
(REGISTRANT)
By/s/ Edward Netter
-----------------
Edward Netter
Chairman and
Chief Executive Officer
Director
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities
indicated as of the 25th day of March, 1999.
/s/ Harold E. Johnson
- ---------------------
Harold E. Johnson
Director
/s/ Allan C. Kirkman
- --------------------
Allan C. Kirkman
Director
/s/ Steven B. Lapin
- -------------------
Steven B. Lapin
Director, President and
Chief Operating Officer
/s/ Donald T. Netter
- --------------------
Donald T. Netter
Director
-36-
<PAGE>
/s/ Edward Netter
- -----------------
Edward Netter
Director, Chairman
and Chief Executive Officer
(Principal Executive Officer)
/s/ Edward J. Scheider
- ----------------------
Edward J. Scheider
Director
/s/ Roy T.K. Thung
- ------------------
Roy T.K. Thung
Director, Executive
Vice President,
Chief Financial Officer
and Treasurer
(Principal Financial Officer)
/s/ Teresa A. Herbert
- ---------------------
Teresa A. Herbert
Vice President
and Controller
(Principal Accounting Officer)
-37-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGES
-----
INDEPENDENT AUDITORS' REPORT.............................. 39
CONSOLIDATED FINANCIAL STATEMENTS:
- ---------------------------------
Consolidated Balance Sheets at December 31, 1998
and 1997................................................ 40
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996......................... 41
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996..... 42
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.........................43 - 44
Notes to Consolidated Financial Statements................45 - 73
SCHEDULES:*
- ---------
Summary of investments - other than investments in
affiliates at December 31, 1998(Schedule I)..............74 - 75
Condensed financial information of parent company
(Schedule III)...........................................76 - 80
Supplementary insurance information (Schedule V).......... 81
EXHIBIT INDEX............................................. 82
*All other schedules have been omitted as they are not applicable
or not required, or the information is given in the consolidated
financial statements, notes thereto or in other schedules.
-38-
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INDEPENDENCE HOLDING COMPANY:
We have audited the consolidated financial statements of
Independence Holding Company and subsidiaries as listed in the
accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the
financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Independence Holding Company and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also in our opinion, the related
financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
KPMG LLP
New York, New York
March 11, 1999
-39-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------
ASSETS:
Cash and cash equivalents.............$ 7,889,000 $ 23,028,000
Investments:
Short-term investments............... 25,250,000 18,265,000
Securities purchased under agreements
to resell (Note 3).................. 11,681,000 25,469,000
Fixed maturities (Note 4)............ 220,030,000 201,324,000
Equity securities (Note 4)........... 17,004,000 13,496,000
Other investments (Note 8)........... 52,191,000 50,459,000
----------- -----------
Total investments................... 326,156,000 309,013,000
Deferred acquisition costs (Note 1)... 14,247,000 13,611,000
Due and unpaid premiums............... 10,313,000 6,448,000
Due from reinsurers................... 128,425,000 92,990,000
Notes and other receivables........... 3,844,000 3,292,000
Other assets (Note 1)................. 9,438,000 6,356,000
----------- -----------
TOTAL ASSETS.........................$500,312,000 $454,738,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities (Note 1)....$236,214,000 $169,082,000
Unearned premiums..................... 21,029,000 27,893,000
Funds on deposit...................... 62,498,000 72,187,000
Insurance policy claims (Note 9)...... 5,380,000 6,279,000
Other policyholders' funds............ 3,370,000 2,651,000
Financial instruments sold, but not
yet purchased (Note 4)............... 458,000 -
Due to brokers........................ 18,933,000 43,356,000
Due to reinsurers..................... 14,320,000 4,349,000
Accounts payable, accruals and other
liabilities.......................... 21,235,000 23,516,000
Liability for business transferred
(Note 10)............................ - 7,905,000
Income taxes (Note 15)................ 7,348,000 6,515,000
----------- -----------
TOTAL LIABILITIES.................... 390,785,000 363,733,000
----------- -----------
STOCKHOLDERS' EQUITY: (Notes 12, 13 and 14)
Preferred stock (none issued).......... - -
Common stock, 7,367,000 and 7,430,169
shares issued and outstanding,
respectively, net of 2,249,019 and
2,188,950 shares in treasury,
respectively.......................... 7,367,000 7,430,000
Paid-in capital........................ 83,191,000 76,046,000
Accumulated other comprehensive income:
Unrealized gains on investments, net.. 2,643,000 1,892,000
Retained earnings...................... 16,326,000 5,637,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY............ 109,527,000 91,005,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............$500,312,000 $454,738,000
=========== ===========
See accompanying notes to consolidated financial statements.
-40-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------------
REVENUES:
Premiums earned (Note 17).........$ 80,658,000 $ 82,201,000 $ 69,585,000
Net investment income (Note 6).... 21,624,000 21,534,000 16,917,000
Net realized and unrealized
gains (Note 7)................... 2,013,000 539,000 190,000
Equity income (loss).............. 158,000 371,000 (33,000)
Other income...................... 6,161,000 2,112,000 2,685,000
----------- ----------- ----------
110,614,000 106,757,000 89,344,000
----------- ----------- ----------
EXPENSES:
Insurance benefits, claims and
reserves......................... 59,631,000 58,561,000 49,788,000
Amortization of deferred
acquisition costs (Note 1)....... 5,306,000 3,581,000 3,819,000
Interest expense on long-term
debt............................. - - 733,000
Selling, general and
administrative expenses.......... 31,267,000 31,327,000 28,184,000
---------- ---------- ----------
96,204,000 93,469,000 82,524,000
---------- ---------- ----------
Operating income before income
taxes............................ 14,410,000 13,288,000 6,820,000
Income tax expense (Note 15)...... 3,353,000 2,101,000 110,000
---------- ---------- ---------
Income from continuing
operations....................... 11,057,000 11,187,000 6,710,000
Income from discontinued
operations, net (Note 2)......... - - 1,048,000
---------- ---------- ---------
NET INCOME........................$ 11,057,000 $ 11,187,000 $ 7,758,000
========== ========== =========
BASIC INCOME PER COMMON SHARE:
Income from continuing operations.$ 1.49 $ 1.51 $ .90
Income from discontinued
operations, net.................. - - .14
---------- ---------- ---------
Net income........................$ 1.49 $ 1.51 $ 1.04
========== ========== =========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING....................... 7,415,000 7,431,000 7,432,000
========== ========== =========
DILUTED INCOME PER COMMON SHARE:
Income from continuing
operations......................$ 1.47 $ 1.49 $ .90
Income from discontinued
operations, net................. - - .14
---------- --------- ---------
Net income........................$ 1.47 $ 1.49 $ 1.04
========== ========= =========
WEIGHTED AVERAGE DILUTIVE SHARES
OUTSTANDING....................... 7,538,000 7,509,000 7,486,000
========== ========= =========
See accompanying notes to consolidated financial statements.
-41-
<PAGE>
<TABLE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED RETAINED
OTHER EARNINGS TOTAL
COMMON STOCK PAID-IN COMPREHENSIVE (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL INCOME, NET DEFICIT) EQUITY
--------------------- ---------------------------------------------------
BALANCE AT DECEMBER 31, 1995........7,432,274 $7,432,000 $76,245,000 $ 495,000 $(12,565,000) $71,607,000
COMPREHENSIVE INCOME: --------- --------- ---------- ----------- ----------- -----------
Net income........................ 7,758,000 7,758,000
Net change in unrealized
losses........................... (1,961,000) (1,961,000)
-----------
TOTAL COMPREHENSIVE INCOME 5,797,000
Purchase of common stock -----------
and warrants..................... (505) (5,000) (5,000)
Capital transactions of
subsidiary....................... (172,000) (172,000)
Common stock dividend.............. (371,000) (371,000)
--------- --------- ---------- --------- ------------ -----------
BALANCE AT DECEMBER 31, 1996.......7,431,769 7,432,000 76,068,000 (1,466,000) (5,178,000) 76,856,000
COMPREHENSIVE INCOME: --------- --------- ---------- --------- ------------ -----------
Net income........................ 11,187,000 11,187,000
Net change in unrealized gains.... 3,358,000 3,358,000
-----------
TOTAL COMPREHENSIVE INCOME 14,545,000
Purchase of common stock -----------
and warrants..................... (1,600) (2,000) (22,000) (24,000)
Common stock dividend............. (372,000) (372,000)
---------- --------- ---------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1997........ 7,430,169 7,430,000 76,046,000 1,892,000 5,637,000 91,005,000
COMPREHENSIVE INCOME: ---------- --------- ---------- ---------- ------------ -----------
Net income........................ 11,057,000 11,057,000
Net change in unrealized gains.... 751,000 751,000
-----------
TOTAL COMPREHENSIVE INCOME 11,808,000
Purchase of common stock -----------
and warrants..................... (68,669) (69,000) (809,000) (878,000)
Exercise of common stock options.. 5,500 6,000 49,000 55,000
Credit for liability of
business transferred............. 7,905,000 7,905,000
Common stock dividend............. (368,000) (368,000)
---------- --------- ---------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 1998........ 7,367,000 $7,367,000 $83,191,000 $2,643,000 $ 16,326,000 $109,527,000
========== ========= ========== ========== ============ ===========
See accompanying notes to consolidated financial statements.
-42-
</TABLE>
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................$ 11,057,000 $ 11,187,000 $ 7,758,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of deferred
acquisition costs.............. 5,306,000 3,581,000 3,819,000
Realized (gains) losses on
sales of investment securities. (2,111,000) (730,000) 30,000
Unrealized losses (gains) on
trading securities............. 98,000 191,000 (220,000)
Equity (income)loss............. (158,000) (371,000) 33,000
Depreciation and amortization... 542,000 440,000 335,000
Deferred tax (benefits) expense. (512,000) 206,000 (260,000)
Income from discontinued
operations, net................ - - (1,048,000)
Other........................... (274,000) (867,000) 6,000
Change in assets and
liabilities:
Net sales (purchases) of
trading securities............. 483,000 (1,692,000) 905,000
Increase in future
insurance policy benefits,
claims and other policy
liabilities.................... 52,011,000 80,003,000 48,236,000
Additions to deferred
acquisition costs.............. (4,682,000) (5,971,000) (5,884,000)
Change in net amounts due from
and to reinsurers.............. (25,051,000) (44,528,000) (3,471,000)
Change in income tax liability.. 667,000 1,107,000 (176,000)
Change in due and unpaid
premiums....................... (3,865,000) (1,326,000) (1,657,000)
Other........................... (5,237,000) 3,913,000 2,250,000
---------- ---------- ----------
Net cash provided by
operating activities........ 28,274,000 45,143,000 50,656,000
---------- ---------- ----------
(CONTINUED)
-43-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from
and to brokers.................. (24,635,000) 23,569,000 (691,000)
Sales and maturities of
short-term investments.......... 73,251,000 56,881,000 31,542,000
Purchases of short-term
investments..................... (78,418,000) (64,793,000) (34,479,000)
Net sales (purchases) of resale
and repurchase agreements....... 13,788,000 11,073,000 (31,348,000)
Sales of equity securities....... 53,390,000 31,299,000 23,313,000
Purchases of equity securities... (56,246,000) (37,524,000) (20,723,000)
Sales and maturities of fixed
maturities...................... 174,459,000 190,372,000 187,206,000
Purchases of fixed maturities.... (188,907,000) (222,672,000)(215,254,000)
Proceeds on sales of other
investments..................... 11,105,000 3,970,000 8,488,000
Additional investments in
other investments, net of
distributions................... (12,677,000) (20,327,000) (15,786,000)
Discontinued operations, net..... - - 18,470,000
Acquisition of company........... (2,188,000) - -
Other............................ (1,044,000) 262,000 (1,339,000)
---------- ---------- ----------
Net cash used by
investing activities........ (38,122,000) (27,890,000) (50,601,000)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock and
warrants........................ (878,000) (24,000) (5,000)
Exercise of common stock options. 55,000 - -
Payments of investment-type
insurance contracts............. (4,096,000) (4,190,000) (4,190,000)
Repayment of long-term debt...... - - (12,061,000)
Dividends paid................... (372,000) (372,000) (298,000)
--------- ---------- ----------
Net cash used by
financing activities........ (5,291,000) (4,586,000) (16,554,000)
--------- ---------- ----------
(Decrease) increase in cash
and cash equivalents............. (15,139,000) 12,667,000 (16,499,000)
Cash and cash equivalents,
beginning of year................ 23,028,000 10,361,000 26,860,000
---------- ---------- ----------
Cash and cash equivalents,
end of year......................$ 7,889,000 $ 23,028,000 $ 10,361,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
-44-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a 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."
On December 31, 1996, IHC consummated the distribution of
the common stock of its majority-owned sign manufacturing
subsidiary, Zimmerman Sign Company ("Zimmerman"), on a pro rata
basis to the holders of record of IHC's common stock as of
December 20, 1996. The Consolidated Financial Statements of the
Company present Zimmerman as discontinued operations (see Notes 2
and 10).
Geneve Corporation, a diversified financial holding company,
and its affiliated entities (collectively, "Geneve") held
approximately 55% of IHC's outstanding common stock at December
31, 1998.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF FINANCIAL
STATEMENTS
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and
include the accounts of IHC and its subsidiaries. All significant
intercompany transactions have been eliminated in consolidation.
Investments in partnerships which are not consolidated are
carried on the equity method, which approximates the Company's
equity in their underlying net book value.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect: (i) the reported
amounts of assets and liabilities; (ii) the disclosure of
contingent assets and liabilities at the date of the financial
statements; and (iii) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
(C) ONE-FOR-TWO REVERSE STOCK SPLIT
A one-for-two reverse stock split (the "reverse stock
split") of IHC's common stock became effective on June 28, 1996;
accordingly, common shares outstanding and per share calculations
reflect the reverse stock split.
-45-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(D) RECLASSIFICATION
Certain amounts in prior years' consolidated financial
statements and notes thereto have been reclassified to conform to
the 1998 presentation.
(E) CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are carried at cost which approximates fair
value and include principally interest-bearing deposits at
brokers, money market instruments and U.S. Treasury securities
with original maturities of less than 91-day maturity.
Investments with original maturities of 91-days to 1 year are
considered short-term investments and are carried at cost which
approximates fair value.
(F) SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell ("resale
agreements") and securities sold under agreements to repurchase
("repurchase agreements") are treated as financing transactions
and are carried at the amounts at which the securities will be
subsequently resold or repurchased as specified in the
agreements.
(G) INVESTMENTS IN SECURITIES
(i) Investments in fixed income securities (bonds (including
Government National Mortgage Association ("GNMA") bonds)), notes
and redeemable preferred stock), equity securities, and
derivatives (options and options on future contracts) are valued
as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Investments in fixed income and equity
securities are carried as follows:
(a) Fixed income securities which are being held to
maturity ("held to maturity") are carried at amortized cost.
(b) Securities which are held for trading purposes are
carried at estimated fair value ("fair value"). Unrealized gains
or losses are credited or charged, as appropriate, to the
Consolidated Statements of Operations.
(c) Securities which may or may not be held to maturity
("available-for-sale") are carried at fair value. Unrealized
gains or losses, net of deferred income taxes and adjustments to
deferred policy acquisition costs, are credited or charged, as
appropriate, directly to stockholders' equity. Realized gains and
-46-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
losses on sales of available-for-sale securities, and unrealized
losses considered to be other than temporary, are credited or
charged to the Consolidated Statements of Operations.
(ii) Financial instruments sold, but not yet purchased,
represent obligations to replace borrowed securities that have
been sold. Such transactions occur in anticipation of declines
in the fair value of the securities. The Company's risk is an
increase in the fair value of the securities sold in excess of
the consideration received, but that risk is mitigated as a
result of relationships to certain securities owned. Unrealized
gains or losses on open transactions are credited or charged, as
appropriate, to the Consolidated Statement of Operations. While
the transaction is open, the Company will also incur an expense
for any accrued dividends or interest payable to the lender of
the securities. When the transaction is closed, the Company
realizes a gain or loss in an amount equal to the difference
between the price at which the securities were sold and the cost
of replacing the borrowed securities.
(iii) Gains or losses on sales of securities are determined
on the basis of specific identification.
(iv) The Company enters into derivative financial
instruments, such as put and call option contracts on interest
rate futures contracts, to minimize losses on portions of the
Company's fixed income portfolio in a rapidly changing interest
rate environment and equity index options to offset fluctuations
in the equity markets. The derivative financial instruments are
all readily marketable and are carried on the Consolidated
Balance Sheets at their current fair value with changes in
unrealized gains or losses, net of deferred income taxes,
credited or charged, as appropriate, directly to stockholders'
equity for investments carried as available-for-sale or to the
Consolidated Statement of Operations for investments carried as
trading. All realized gains and losses are reflected currently
in the Consolidated Statement of Operations. The Company did not
enter into a material amount of derivative financial instruments
in 1998.
(v) Fair value is determined by quoted market prices, where
available, or by independent pricing services.
(H) PARTNERSHIP INTERESTS
Partnership interests primarily consist of investments in
partnerships that have relatively "market neutral" arbitrage
strategies, and all securities held by these partnerships are
carried at fair value. All partnership investments are carried
-47-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
on the equity method, which approximates the Company's equity in
their underlying net book value.
(I) MORTGAGE LOANS AND POLICY LOANS
Mortgage loans and policy loans are stated at their
aggregate unpaid balances.
(J) DEFERRED ACQUISITION COSTS
The costs of acquiring new insurance business, principally
commissions and certain variable underwriting, agency and policy
issuance expenses, have been deferred and are being amortized,
with interest, over the premium paying period of the related
insurance policies in proportion to the ratio of the annual
premium revenue to the total anticipated premium revenue.
Anticipated premium revenue was estimated using assumptions as to
mortality (morbidity on health insurance) and withdrawals
consistent with those used in calculating future insurance policy
benefits. Credit life and credit accident and health deferred
insurance acquisition costs are amortized proportionally over the
period during which the premium is earned. Deferred acquisition
costs are periodically reviewed to determine recoverability from
future income, including investment income, and, if not
recoverable, are charged to expense. Deferred acquisition costs
have been decreased by $588,000 representing the portion of
unrealized gains in stockholders' equity that would be allocated
to deferred acquisition costs had such securities been sold and
gains realized.
(K) PROPERTY AND EQUIPMENT
Property and equipment included in other assets are stated
at cost of $1,894,000 and $1,723,000 which is net of accumulated
depreciation and amortization of $2,069,000 and $1,734,000 in
1998 and 1997, respectively. Improvements are capitalized while
repair and maintenance costs are charged to operations as
incurred. Depreciation of property and equipment has been
provided on the straight-line method over the estimated useful
lives of the respective assets. Amortization of leasehold
improvements has been provided on the straight-line method over
the shorter of the lease term or the estimated useful life of the
asset.
-48-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(L) FUTURE INSURANCE POLICY LIABILITIES
Liabilities for future insurance policy benefits, including
future dividends on participating policies, have been computed
primarily using the net level premium method based on anticipated
investment yield, mortality (morbidity on health insurance) and
withdrawals. Life reserve interest rates are generally graded and
range from 2% to 9% per annum. Withdrawals are based on
experience.
Future policy benefits consist of the following at December
31, 1998 and 1997:
1998 1997
----------------------
(IN THOUSANDS)
Life.............................$ 99,156 $ 67,028
Accident and health.............. 137,058 102,054
------- -------
$236,214 $169,082
======= =======
(M) FUNDS ON DEPOSIT
Funds received for certain long-duration contracts
(principally, annuities and universal life policies) are credited
directly to a policyholder liability account-funds on deposit.
Withdrawals are recorded directly as a reduction of respective
policyholders' funds on deposit. Amounts on deposit were credited
at an annual rate of 4.5% to 13.9% in 1998 and 1997.
(N) INSURANCE PREMIUM REVENUE RECOGNITION
Premiums from short-duration contracts ordinarily will be
recognized as revenue over the period of the contracts in
proportion to the amount of insurance protection provided.
Premiums from long-duration contracts are recognized as revenue
when due from policyholders.
(O) PARTICIPATING POLICIES
Participating policies represent 15.8%, 12.9%, and 7.0% of
the individual life insurance in-force and 1.4%, 0.8%, and 1.7%
of the net premiums earned, as of and for the years ended
December 31, 1998, 1997 and 1996, respectively, and provide for
the payment of dividends. Dividends to policyholders are
determined annually and are payable only upon declaration by the
Board of Directors of the insurance companies. With respect to
Standard Life, New York State Insurance Department requirements
limit the amount of profit on participating policies which can
inure to stockholders to 10% of such profits or $.50 per year per
-49-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
$1,000 of such insurance in-force, whichever is greater. A
significant portion of the participating business is comprised of
non-dividend paying policies. With regard to the remaining
policies, dividends are either paid or earned on participating
policies based on guaranteed contract dividend amounts, by a flat
percentage of premiums, or by the same dollar amount paid in
prior years as long as the policy is premium paying. Because of
the methods described above, no allocation method of earnings is
required. At December 31, 1998, the stockholder's equity of the
insurance companies was not restricted because of participating
policyholders' surplus.
(P) DEFERRED INCOME TAXES
The provision for deferred income taxes is based on the
asset and liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized by applying
enacted statutory tax rates applicable to future years to
temporary differences related to amounts included in the
Consolidated Statement of Operations arising from differences
between amounts reported in the Consolidated Financial Statements
and the tax bases of existing assets and liabilities. The effect
on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
(Q) INCOME PER COMMON SHARE
In December 1997, the Company adopted 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, 1997 and 1996, respectively, are
123,000, 78,000 and 54,000 incremental shares 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 1,939,739 shares of common stock at $16.37
per share were not included in the computation of diluted
earnings per share because the warrants' strike price was greater
than the average market price of the common shares during 1998,
1997 and 1996.
(R) REINSURANCE
Amounts paid for or recoverable under reinsurance contracts
are included in total assets as reinsurance balances, or
reinsurance prepaid. The cost of reinsurance related to long-
duration contracts is accounted for over the life of the
underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
-50-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
(S) STOCK BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock-based compensation
plan. Since stock options under the plan are issued at fair
value on date of grant, no compensation cost has been
recognized in the Consolidated Statement of Operations.
Accordingly, the Company follows the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
(T) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The requirements for SFAS
No. 133 are effective for fiscal years beginning after June 15,
1999. The Company is evaluating the statement but does not expect
it to have a material impact on the Company.
During 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No.
131 establishes standards for the disclosure of information about
the Company's operating segments. The adoption of SFAS No. 130
and 131 did not have an impact on the Company's results of
operations, financial condition or liquidity.
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
impact on the Company.
NOTE 2. DISCONTINUED OPERATIONS
On December 31, 1996, IHC consummated the distribution of
the common stock of Zimmerman on a pro rata basis to holders of
record of IHC's common stock as of December 20, 1996.
The terms of the distribution provided for IHC shareholders
to receive one share of Zimmerman common stock for each five
shares of IHC common stock, and cash in lieu of fractional
shares. IHC received a ruling from the Internal Revenue Service
that the distribution would be tax-free to IHC shareholders, and
that IHC would not recognize income, gain or loss as a result of
the transaction.
-51-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
In connection with the distribution, Zimmerman entered into
banking arrangements in October 1996 to borrow up to an aggregate
of $33,000,000, of which $10,000,000 consisted of subordinated
debt guaranteed by a subsidiary of IHC (such guarantee has
subsequently been terminated - see also Note 10). The proceeds of
borrowing by Zimmerman under such arrangements were used, among
other things, to repay all of its prior outstanding indebtedness
and to pay a $19,701,000 special cash dividend to its
shareholders. From its $18,470,000 portion of the special
dividend, IHC repaid all of its $10,000,000 of indebtedness,
contributed $5,000,000 to Madison Life in exchange for a surplus
note, and used the balance for working capital. Expenses of
$1,106,000 incurred in connection with the distribution
transaction are recorded in discontinued operations, net on the
Consolidated Statement of Operations.
Since Zimmerman has historically comprised all of the
Company's manufacturing segment, the Consolidated Financial
Statements and notes thereto of the Company reflect Zimmerman as
discontinued operations.
Income from discontinued operations for the year ended
December 31, 1996 is summarized as follows:
1996
--------------
(IN THOUSANDS)
Revenues.................... $41,227
======
Operating income from
discontinued operations,
net of minority interest... $ 1,709
Income taxes................ 661
------
Net income from
discontinued operations.... $ 1,048
======
During 1996, Zimmerman was included in the consolidated
federal income tax return filed by the Company. On a separate
company basis, Zimmerman had a tax sharing agreement with IHC for
the periods presented; accordingly, discontinued operations are
shown net of applicable taxes in accordance with such agreement.
-52-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 3. RESALE AGREEMENTS
Resale agreements are utilized to invest excess funds on a
short-term basis. At December 31, 1998, the Company had
$11,681,000 in resale agreements outstanding, all of which
settled on January 4, 1999 and were subsequently reinvested. The
Company maintains control of securities purchased under resale
agreements and values the collateral on a daily basis and obtains
additional collateral, if necessary, to protect the Company in
the event of default by the counterparties.
NOTE 4. INVESTMENT SECURITIES
The cost, (amortized cost with respect to certain fixed
maturities) gross unrealized gains, gross unrealized losses and
fair value of investments in securities are as follows:
DECEMBER 31, 1998
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities...$ 42,472 $ 1,026 $ (291) $ 43,207
U.S. Government and
agencies obligations.. 55,133 1,533 (201) 56,465
GNMA's................. 116,171 2,040 (147) 118,064
Obligations of states
and political
subdivisions.......... 2,346 69 (121) 2,294
------- ------- ------- -------
Total fixed maturities..$216,122 $ 4,668 $ (760) $220,030
======= ======= ======= =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock...........$ 10,513 $ 956 $ (171) $ 11,298
Preferred stock........ 4,339 76 (71) 4,344
------- ------- ------- -------
14,852 1,032 (242) 15,642
------- ------- ------- -------
TRADING:
Common stock........... 1,448 295 (381) 1,362
------- ------- ------- -------
Total equity securities.$ 16,300 $ 1,327 $ (623) $ 17,004
======= ======= ======= =======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
TRADING:
Common stock...........$ (386) $ - $ (72) $ (458)
======= ======= ======= =======
-53-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1997
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities...$ 29,974 $ 392 $ (247) $ 30,119
U.S. Government and
agencies obligations.. 43,510 690 (54) 44,146
GNMA's................. 123,464 1,287 (7) 124,744
Obligations of states
and political
subdivisions.......... 2,352 63 (100) 2,315
------- ------- ------- -------
Total fixed maturities..$199,300 $ 2,432 $ (408) $201,324
======= ======= ======= =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock...........$ 8,771 $ 786 $ (98) $ 9,459
Preferred stock........ 2,059 206 - 2,265
------- ------- ------- -------
10,830 992 (98) 11,724
------- ------- ------- -------
TRADING:
Common stock........... 1,832 71 (131) 1,772
------- ------- ------- -------
Total equity securities.$ 12,662 $ 1,063 $ (229) $ 13,496
======= ======= ======= =======
The amortized cost and fair value of fixed maturities at
December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Excluding extraordinary paydowns, the average life of GNMA's is
materially less than the stated maturity.
AMORTIZED FAIR % OF
COST VALUE FAIR VALUE
-------------------------------
(IN THOUSANDS)
Due after one year through
five years......................$ 8,790 $ 9,022 4.1%
Due after five years through
ten years....................... 45,081 45,913 20.9%
Due after ten years.............. 46,080 47,031 21.3%
------- ------- -----
99,951 101,966 46.3%
GNMA's - 15 year................. 34,805 35,623 16.2%
GNMA's - 30 year................. 81,366 82,441 37.5%
------- ------- -----
$216,122 $220,030 100.0%
======= ======= =====
-54-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 4. INVESTMENT SECURITIES (CONTINUED)
The average fair value of trading options and futures
contract sold, but not yet purchased was $64,000 and $85,000 for
1998 and 1997, respectively.
Gross gains of $5,589,000 and gross losses of $3,191,000
were realized on sales of available-for-sale securities for the
year ended December 31, 1998.
Gross gains of $3,971,000 and gross losses of $3,423,000
were realized on sales of available-for-sale securities for the
year ended December 31, 1997.
At December 31, 1998 the Company had no investments in
derivative financial instruments.
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of financial instruments not disclosed elsewhere
in the notes:
(A) MORTGAGE LOANS
The fair value of mortgage loans is calculated by
discounting the scheduled cash flows at a current market interest
rate adjusted for credit risk. Prepayments were not assumed to
occur due to the low interest rates on the mortgages.
(B) POLICY LOANS
The fair value of policy loans is calculated by projecting
the current policy loans in the aggregate to the end of the
expected lifetime period of the life insurance business at the
average policy loan rates and discounting them at a current
market policy loan interest rate.
(C) FUNDS ON DEPOSIT
The Company has two types of funds on deposit. The first
type is credited with a current market interest rate, resulting
in a carrying value which approximates fair value. The second
type carries fixed interest rates which are currently higher than
current market interest rates. The fair value of these deposits
was determined by discounting the payments using current market
interest rates. The Company's universal life policies are also
credited with current market interest rates, resulting in a
carrying value which approximates fair value.
-55-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 5. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
(CONTINUED)
The estimated fair values of financial instruments are as
follows:
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------------------------------------
(IN THOUSANDS)
FINANCIAL ASSETS:
Fixed maturities.....$220,030 $220,030 $201,324 $201,324
Equity securities.... 17,004 17,004 13,496 13,496
Mortgage loans....... 245 263 291 313
Policy loans......... 12,390 13,373 8,677 8,327
FINANCIAL LIABILITIES:
Funds on deposit..... 62,498 63,976 72,187 74,280
Financial instruments
sold but not yet
purchased........... 458 458 - -
NOTE 6. NET INVESTMENT INCOME
Major categories of net investment income for the years
ended December 31, 1998, 1997 and 1996 are summarized as follows:
1998 1997 1996
------------------------------
(IN THOUSANDS)
Fixed maturities................$14,563 $12,471 $11,146
Equity securities............... 850 406 404
Short-term investments.......... 1,050 1,444 1,437
Other........................... 1,161 500 521
Interest income earned from
assumption reinsurance
agreements..................... 1,072 1,210 1,102
Investment income from
partnerships................... 3,086 5,831 2,644
Investment expenses............. (158) (328) (337)
------ ------ ------
$21,624 $21,534 $16,917
====== ====== ======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 7. NET REALIZED AND UNREALIZED GAINS (LOSSES)
Net realized and unrealized gains (losses) on investments
for the years ended December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
----------------------------
(IN THOUSANDS)
Fixed maturities................ $ 1,488 $ (209) $ (411)
Equity securities............... 974 1,544 937
Financial instruments sold,
but not yet purchased.......... (319) 113 (75)
Options - available for sale.... (43) (328) (7)
Futures contracts............... - (126) (477)
Other........................... 11 (264) 3
------ ------ ------
Net realized gains (losses)...... 2,111 730 (30)
Net unrealized (losses) gains.... (98) (191) 220
------ ------ ------
$ 2,013 $ 539 $ 190
====== ====== ======
NOTE 8. OTHER INVESTMENTS
Other investments consist of the following at December 31,
1998 and 1997:
1998 1997
-----------------------
(IN THOUSANDS)
Partnership interests.................$ 37,310 $ 40,221
Policy loans.......................... 12,390 8,677
Mortgage loans........................ 245 291
Other................................. 2,246 1,270
------- -------
$ 52,191 $ 50,459
======= =======
Included in partnership interests are the following significant
investments:
A) Dolphin Limited Partnership
The Company had invested $18,160,000 and $19,358,000 at
December 31, 1998 and 1997, respectively, in Dolphin Limited
Partnership A ("DLP-A"), a limited partnership which invests in
relatively "market neutral" strategies, such as merger arbitrage,
convertible arbitrage and distressed situations (DLP-A is the
successor to Dolphin Limited Partnership).
The term "market neutral" strategies includes "merger
arbitrage" and "convertible arbitrage," and means strategies
which are less affected by general movements in the equity and
-57-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 8. OTHER INVESTMENTS (CONTINUED)
fixed income markets than traditional investments. "Merger
arbitrage" is an investment strategy designed to profit from the
successful completion of proposed mergers, takeovers, tender
offers, leveraged buy-outs, recapitalizations and spin-offs.
"Convertible arbitrage" is a strategy principally designed to
capitalize on discrepancies in the pricing of convertible
securities and their underlying common stock or stock equivalent.
"Equity arbitrage" means a portfolio of equity securities hedged
by utilizing various other securities (all of which are traded on
national exchanges), which reduce market risk and/or industry
risk. To a lesser extent, DLP-A also invests in "distressed
situations" which principally means entities which are in
bankruptcy proceedings or are otherwise financially distressed.
While these strategies are considered relatively "market
neutral," there are also risks associated with the underlying
transactions.
The condensed balance sheets of DLP-A at December 31, 1998
and 1997 are as follows:
1998 1997
--------------------
(IN THOUSANDS)
Investments at market value................$ 43,172 $ 40,563
Due from brokers........................... 25,569 14,535
Other assets............................... 150 146
------- -------
Total assets..........................$ 68,891 $ 55,244
======= =======
Financial instruments sold, but not
yet purchased.............................$ 21,109 $ 11,001
Other liabilities.......................... 96 71
------- -------
Total liabilities..................... 21,205 11,072
------- -------
Partners' capital:
IHC....................................... 18,160 19,358
Other partners............................ 29,526 24,814
------- -------
Partners' capital.......................... 47,686 44,172
------- -------
Total liabilities and
partners' capital....................$ 68,891 $ 55,244
======= =======
The condensed statements of operations for DLP-A for the
years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---------------------------
(IN THOUSANDS)
Net realized and unrealized gains...$ 6,101 $ 10,459 $ 5,145
Net investment income............... 1,825 1,592 1,123
------- ------- -------
Total revenues..................... 7,926 12,051 6,268
Expenses............................ 1,629 1,387 859
------- ------ ------
Net income..........................$ 6,297 $ 10,664 $ 5,409
======= ======= =======
IHC's share of net income...........$ 2,102 $ 4,016 $ 1,681
======= ======= =======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 8. OTHER INVESTMENTS (CONTINUED)
B) Incopoint Limited Partnership
The Company had invested $10,965,000 and $11,299,000 at
December 31, 1998 and 1997, respectively, in Incopoint Limited
Partnership ("Incopoint"), a limited partnership which invests in
relatively "market neutral" strategies, such as equity arbitrage
in the utility sector.
The condensed balance sheets of Incopoint at December 31,
1998 and 1997 are as follows:
1998 1997
--------------------
(IN THOUSANDS)
Cash and investments at market value.......$ 27,430 $ 52,231
Other assets............................... 133 1,854
------- -------
Total assets..........................$ 27,563 $ 54,085
======= =======
Financial instruments sold, but not
yet purchased.............................$ 4,943 $ 27,703
Other liabilities.......................... 745 2,526
------- -------
Total liabilities..................... 5,688 30,229
------- -------
Partners' capital:
IHC....................................... 10,965 11,299
Other partners............................ 10,910 12,557
------- -------
Partners' capital.......................... 21,875 23,856
------- -------
Total liabilities and
partners' capital....................$ 27,563 $ 54,085
======= =======
The condensed statements of operations for Incopoint for the
years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---------------------------
(IN THOUSANDS)
Net realized and unrealized gains...$ 4,554 $ 3,002 $ 2,070
Net investment income (expense)..... (1,010) (98) 56
------- ------- -------
Total revenues..................... 3,544 2,904 2,126
Expenses............................ 25 135 142
------- ------- -------
Net income..........................$ 3,519 $ 2,769 $ 1,984
======= ======= =======
IHC's share of net income...........$ 1,666 $ 1,290 $ 922
======= ======= =======
NOTE 9. INSURANCE POLICY CLAIMS
The liability for unpaid claims and claim adjustment
expenses represents amounts needed to provide for the estimated
cost of settling claims relating to insured events that have been
incurred prior to the balance sheet date which have not yet been
settled.
-59-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 9. INSURANCE POLICY CLAIMS (CONTINUED)
The change in the liability for unpaid claims and claim
adjustment expenses for the Insurance Group's health and
disability coverages for December 31, 1998, 1997 and 1996 is as
follows:
1998 1997 1996
------------------------------
(IN THOUSANDS)
Balance at beginning of year.....$ 2,814 $ 2,178 $ 3,403
Less: reinsurance recoverables.. 274 512 531
------ ------ ------
Net balance at beginning of year. 2,540 1,666 2,872
------ ------ ------
Amount incurred:
Current year..................... 36,840 35,426 26,997
Prior years...................... 6,679 6,550 7,003
------ ------ ------
Total........................... 43,519 41,976 34,000
------ ------ ------
Amount paid, related to:
Current year..................... 27,570 29,973 22,077
Prior years...................... 15,992 11,130 13,129
------ ------ ------
Total.......................... 43,562 41,103 35,206
------ ------ ------
Net balance end of year.......... 2,497 2,539 1,666
Plus: reinsurance recoverables.. 186 275 512
------ ------ ------
Balance at end of year........... 2,683 2,814 2,178
Unpaid life claims............... 2,697 3,465 1,736
------ ------ ------
Total insurance policy claims....$ 5,380 $ 6,279 $ 3,914
====== ====== ======
The preceding schedule reflects the due and unpaid, in the
course of settlement and estimated incurred but not reported
components of the unpaid claims reserves for the Insurance
Group's health and disability coverages. Unpaid claims reserves
recorded in future policy liabilities, which represent the
present value of amounts not yet due on claims, are not reflected
in the preceding schedule which accounts for a significant
portion of the incurred amounts related to prior years. There is
a significant amount of loss incurred in prior years in the
Insurance Policy Claims Schedule due to the reclassification from
"Future Policy Liabilities" discussed above. The incurred and
paid data above reflects all activity for the year.
-60-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 10. LIABILITY OF BUSINESS TRANSFERRED
In connection with the distribution of Zimmerman, a
subsidiary of the Company guaranteed $10,000,000 of subordinated
debt of Zimmerman (the "Guarantee"). Accordingly, the credit to
stockholders' equity of $7,905,000 or $1.06 per share that would
have been recorded upon consummation of the distribution of
Zimmerman had been deferred until such time as the subordinated
debt was repaid or the Guarantee was eliminated. On September 30,
1998 the Guarantee was terminated; accordingly, the deferred
credit of $7,905,000, or $1.06 per share, was credited to
stockholders' equity as of September 30, 1998.
NOTE 11. LONG-TERM DEBT
A subsidiary of IHC entered into a $10,000,000 line of
credit on October 31, 1996. As to such subsidiary, the line of
credit (i) contains restrictions with respect to, among other
things, the creation of additional indebtedness, the
consolidation or merger with or into certain corporations, the
payment of dividends and the retirement of capital stock, (ii)
requires the maintenance of minimum amounts of net worth, as
defined, certain financial ratios, and certain investment
restrictions and (iii) is secured by the stock of Madison Life
and its immediate parent company and contribution notes of
Madison Life aggregating $25,000,000. At December 31, 1998, there
were no amounts outstanding under the line of credit.
Cash payment for interest was $764,000 for the year ended
December 31, 1996. All long-term debt was repaid during 1996.
NOTE 12. PREFERRED STOCK
IHC has 100,000 authorized shares of par value $1.00 per
share preferred stock.
NOTE 13. COMMON STOCK
(A) IHC has reserved 2,714,431 shares of common stock for
issuance under its stock option plan and outstanding warrants at
December 31, 1998.
(B) In 1991, IHC initiated a program of repurchasing shares of
its common stock and warrants. During 1998, IHC repurchased
68,669 common shares at a cost of $878,000. From January 1, 1991
through December 31, 1998, 2,200,991 common shares, or 24.2% of
the amount outstanding on January 1, 1991, have been repurchased
at a cost of $11,834,000. All of such repurchased shares have
either been retired, reissued, or become treasury shares.
-61-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 13. COMMON STOCK (CONTINUED)
(C) IHC has 15,000,000 authorized shares of par value $1.00 per
share common stock.
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS
(A) STOCK OPTIONS
On May 25, 1988, the stockholders approved the amended and
restated Stock Option and Incentive Stock Option Plan (the
"Plan") under which 800,000 shares of common stock were reserved
for options and other common stock awards to be granted under the
Plan. On March 25, 1998, the Company's Board of Directors
approved certain amendments to the Plan, including eliminating
the prohibition on granting options after May 25, 1998. Under the
terms of the Plan, exercise prices are equal to the quoted market
value of the shares at the date of grant. Further, the options
will expire ten years from the date of grant; with regard to
employees, options will vest ratably over a three-year period
beginning on the first anniversary of the date of grant, and with
regard to directors, options will vest six months from the date
of grant. At December 31, 1998, options to purchase 396,192
shares were available for future grants under the Plan.
As a result of the reverse stock split in 1996, the number
of shares of common stock reserved for issuance, the number of
options outstanding and the exercise price per share of the
outstanding options were adjusted accordingly. As a result of the
spin-off of Zimmerman, the exercise price per share of all
options outstanding was reduced by $0.59.
-62-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
The following table summarizes information with respect to stock
options granted under the Plan for the years ended December 31, 1998, 1997
and 1996:
1998 1997 1996
---------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding,
beginning of year... 385,250 $ 6.73 338,250 $ 6.52 316,250 $ 6.37
Granted.............. 10,500 $14.94 62,000 $ 7.77 22,000 $ 8.58
Exercised............ (5,500) $10.07 - - - -
Forfeited............ (11,750) $ 7.33 (15,000) $ 6.10 - -
------- ------- -------
Outstanding,
end of year......... 378,500 $ 6.90 385,250 $ 6.73 338,250 $ 6.52
======= ======= =======
Exercisable
at year end......... 312,833 216,167 118,750
======= ======= =======
The following table is a summary of stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- --------------------------------------------------- --------------------
Remaining
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
(In Years)
$ 1.91 - $ 3.28 4,500 2.8 $ 2.36 4,500 $ 2.36
$ 5.16 - $ 5.97 190,500 6.2 $ 5.96 190,500 $ 5.96
$ 7.09 - $10.25 171,500 7.4 $ 7.53 114,833 $ 7.40
$10.91 - $11.91 1,500 0.4 $10.91 1,500 $10.91
$13.81 - $15.13 10,500 3.5 $14.94 1,500 $13.81
------- -------
$ 1.91 - $15.13 378,500 6.6 $ 6.90 312,833 $ 6.50
======= =======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plan. Since stock options
under the Plan are issued at fair market value on date of the
grant, no compensation cost has been recognized in the
Consolidated Statement of Operations.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
establishes a fair value based method of accounting for stock-
based compensation plans as an alternative to APB Opinion No. 25
whereby the compensation cost is measured at the grant date based
on the value of the award, and such cost is recognized over the
vesting period of the options. Had the Company applied SFAS No.
123 in accounting for stock options, net income and net income
per share, basic, for the years ended December 31, 1998, 1997 and
1996 would have been as follows:
1998 1997 1996
---- ---- ----
In Per In Per In Per
Thousands Share Thousands Share Thousands Share
--------- ----- --------- ----- --------- -----
Net income,
as reported $11,057 $1.47 $11,187 $1.49 $ 7,758 $1.04
SFAS No. 123
pro forma
adjustments (217) (.03) (321) (.04) (287) (.04)
------ ---- ------ ----- ------ ----
Net income,
pro forma $10,840 $1.44 $10,866 $ 1.45 $ 7,471 $1.00
====== ==== ====== ===== ====== ====
No tax credit has been provided on the calculation of SFAS
No. 123 because a valuation allowance would have been provided
for this temporary difference.
The pro forma adjustments relate to options granted during
1998, 1997 and 1996 for which a fair value on the date of the
grant was determined using the Black-Scholes model of theoretical
options pricing, and were based on the following assumptions: (i)
expected volatility is based on the three year period, calculated
weekly, preceding the date of grant; (ii) the risk-free rate of
return is based on the 10-year U.S. Treasury Note yield to
maturity as at the date of grant; (iii) dividend yield assumes
that the current dividend rate paid on the Common Stock continues
unchanged until the expiration date of the options; (iv) an
expected life that coincides with the term of the option; and (v)
a three-year phased-in vesting period that averages two years.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 14. STOCK OPTIONS AND SHARE PURCHASE WARRANTS (CONTINUED)
No effect has been given to options granted prior to 1995. The
weighted average fair value of options granted during 1998, 1997
and 1996 was $2.17, $2.95 and $3.48 per share, respectively.
Valuation and related assumption information are presented below:
Weighted averages for options issued during
1998 1997 1996
-------------------------------------------
Valuation assumptions:
Expected life,
in years............... 4.0 10.0 10.0
Expected volatility..... 16.9% 12.0% 12.8%
Risk free interest
rate................... 5.6% 6.4% 6.5%
Expected annual
dividends per share....$ .05 $ .05 $ .05
(B) SHARE PURCHASE WARRANTS
At December 31, 1998, 1,270,294 share purchase warrants were
outstanding. The warrants are exercisable through June 30, 2001
for a maximum of 1,939,739 shares of common stock at $25.00 for
1.527 shares of common stock (which equates to an exercise price
of $16.37 per share) as adjusted for the reverse stock split and
the distribution of Zimmerman.
Since the inception of IHC's repurchase plan through
December 31, 1998, 421,491 warrants have been repurchased at a
cost of $137,000. All of such repurchased warrants have been
retired.
NOTE 15. INCOME TAXES
The Company and its subsidiaries file a consolidated Federal
income tax return on a June 30 fiscal year. The provision for
income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
-----------------------------------
(IN THOUSANDS)
CURRENT:
U.S. Federal..........$ 3,448 $ 1,834 $ 132
State and Local....... 417 61 238
------ ------ ------
3,865 1,895 370
------ ------ ------
DEFERRED:
U.S. Federal.......... (542) 106 (204)
State and Local....... 30 100 (56)
------ ------ ------
(512) 206 (260)
------ ------ ------
Income tax expense....$ 3,353 $ 2,101 $ 110
====== ====== ======
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 15. INCOME TAXES (CONTINUED)
The Federal statutory rate of 34% in 1998, 1997 and 1996 is
reconciled to the Company's effective income tax rate as follows:
1998 1997 1996
-----------------------------------
(IN THOUSANDS)
Tax computed at the
statutory rate.......$ 4,900 $ 4,518 $ 2,319
Dividends received
deduction and tax
exempt interest...... (217) (163) (131)
Special life insurance
statutory deductions. (493) (369) (200)
State income taxes, net
of Federal effect.... 295 107 120
Tax loss carryforwards
recognized for
financial reporting
purposes............. (982) (1,109) (1,922)
Valuation allowance... (508) (860) (118)
Other, net............ 358 (23) 42
------ ------ ------
Income tax expense....$ 3,353 $ 2,101 $ 110
====== ====== ======
The income tax expense for the year ended December 31, 1998
allocated to stockholders' equity for unrealized gains on
investment securities was $422,000, representing the change in
the deferred tax liability of $1,466,000 at December 31, 1998
from the deferred tax liability of $1,044,000 at December 31,
1997.
Temporary differences between the Consolidated Financial
Statement carrying amounts and tax bases of assets and
liabilities that give rise to the deferred tax assets and
liabilities at December 31, 1998 and 1997 relate to the
following:
1998 1997
----------------------
(IN THOUSANDS)
DEFERRED TAX ASSETS:
Loss carryforwards....................$ - $ 1,462
Other investments.................... - 22
Unrealized losses on
investment securities............... 218 62
Deferred insurance policy
acquisition costs................... 3,485 1,636
Future insurance policy benefits..... 1,055 1,197
Other................................ 3,698 3,228
------ ------
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 15. INCOME TAXES (CONTINUED)
1998 1997
----------------------
(IN THOUSANDS)
Total gross deferred
tax assets......................... 8,456 7,607
Less valuation allowance............. (1,758) (3,982)
------- -------
Net deferred tax assets.............. 6,698 3,625
------- -------
DEFERRED TAX LIABILITIES:
Other investments.................... (1,161) (982)
Unrealized gains on
investment securities............... (1,540) (1,015)
Deferred insurance policy
acquisition costs................... (4,402) (4,262)
Future insurance policy
benefits............................ (2,646) (262)
Other................................ (896) (890)
------- -------
Total gross deferred
tax liabilities................ (10,645) (7,411)
------- -------
Net deferred tax liability......$ (3,947) $ (3,786)
======= =======
The $2,224,000 decrease in the valuation allowance for the
year ended December 31, 1998 is primarily attributable to net
changes in loss carryforwards.
Under provisions of the Life Insurance Company Tax Act of
1959, certain special deductions were allowed life insurance
companies for Federal income tax purposes and were accumulated in
a memorandum tax account designated as "policyholders' surplus."
Distributions of the untaxed amounts in this account will result
in the Company incurring an additional tax. The Company has
provided through its income tax provision on operations a tax
expense of $1,122,000 in 1992 and prior years for this additional
tax related to the policyholders' surplus account. A deferred tax
liability of $936,000, related to the $2,753,000 remaining
balance of the policyholders' surplus account, has not been
recognized. This liability will be recognized when the Company
expects that a transaction will occur which will give rise to a
tax on the remaining balance of the policyholders' surplus
account.
Net cash payments for income taxes were $3,405,000, $866,000
and $1,211,000 in 1998, 1997 and 1996, respectively.
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
Certain subsidiaries of the Company are obligated under non-
cancelable operating lease agreements for office space. Total
rental expense for the years 1998, 1997 and 1996 for operating
leases was $804,000, $707,000 and $687,000, respectively.
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<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 16. COMMITMENTS AND CONCENTRATION OF CREDIT RISK
(CONTINUED)
The approximate minimum annual rental expense for operating
leases that have remaining non-cancelable lease terms in excess
of one year at December 31, 1998 are as follows (in thousands):
1999............$ 678
2000............ 589
2001............ 456
2002............ 243
-----
Total $1,966
=====
At December 31, 1998, the Company had no investment
securities of any one issuer or in any one industry which
exceeded 10% of stockholders' equity, except for investments in
obligations of the U.S. Government and its agencies.
Fixed maturities with a carrying value of $5,684,000 and
$5,041,000 were on deposit with various state insurance
departments at December 31, 1998 and 1997, respectively.
The Company knows of no material pending legal proceedings
to which the Company is a party or of which any of its property
is the subject.
NOTE 17. REINSURANCE
Standard Life and Madison Life reinsure portions of certain
business in order to limit the assumption of disproportionate
risks. Standard Life and Madison Life retain varying amounts of
individual life or group life insurance up to a maximum on any
one life of $210,000 and $60,000, respectively. Amounts not
retained are ceded to other companies on an automatic or
facultative basis. Standard Life and Madison Life are
contingently liable with respect to reinsurance in the unlikely
event that the assuming reinsurers are unable to meet their
obligations. In addition, Standard Life and Madison Life
participate in various coinsurance treaties. The ceding of
reinsurance does not discharge the primary liability of the
original insurer to the insured.
The Company had total net receivables of $29,500,000 at
December 31, 1998 from two reinsurers both of which are rated A
or better by A.M. Best. These companies are the only reinsurers
with receivables that individually are in excess of 10% of the
equity of the Company. The Company believes that these
receivables are fully collectible.
The effect of reinsurance on life insurance in-force,
benefits to policyholders and premiums earned is as follows:
-68-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 17. REINSURANCE (CONTINUED)
ASSUMED CEDED
DIRECT FROM OTHER TO OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-----------------------------------------------
(IN THOUSANDS)
LIFE INSURANCE IN-FORCE:
- -----------------------
DECEMBER 31,1998 $6,155,863 $584,726 $2,823,683 $3,916,906 14.9%
DECEMBER 31,1997 5,365,058 787,426 2,443,005 3,709,479 21.2%
DECEMBER 31,1996 4,563,520 488,762 2,215,533 2,836,749 17.2%
BENEFITS TO POLICYHOLDERS:
- -------------------------
DECEMBER 31,1998 $ 134,484 $ 32,104 $ 106,092 $ 60,496 53.1%
DECEMBER 31,1997 117,477 14,635 75,962 56,150 26.1%
DECEMBER 31,1996 95,567 7,867 58,193 45,241 17.4%
PREMIUMS EARNED:
- ---------------
DECEMBER 31, 1998
Life and
annuity.......$ 22,929 $ 5,347 $ 8,332 $ 19,944 26.8%
Health......... 180,593 34,041 153,920 60,714 56.1%
-------- -------- --------- ---------
$ 203,522 $ 39,388 $ 162,252 $ 80,658 48.8%
======== ======== ========= =========
DECEMBER 31, 1997
Life and
annuity.......$ 18,684 $ 4,792 $ 7,065 $ 16,411 29.2%
Health......... 160,699 26,422 121,331 65,790 40.2%
-------- -------- --------- ---------
$ 179,383 $ 31,214 $ 128,396 $ 82,201 38.0%
======== ======== ========= =========
DECEMBER 31, 1996
Life and
annuity...... $ 17,948 $ 2,181 $ 6,974 $ 13,155 16.6%
Health........ 132,125 10,206 85,901 56,430 18.1%
-------- -------- --------- ---------
$ 150,073 $ 12,387 $ 92,875 $ 69,585 17.8%
======== ======== ========= =========
NOTE 18. SEGMENT REPORTING
The Insurance Group engages principally in the life and
health insurance business. Interest expense, taxes, and general
expenses associated with parent company activities are included
in Corporate. Identifiable assets by segment are those assets
that are utilized in each segment and are allocated based upon
the mean reserves of each such segment. Corporate assets are
composed principally of cash equivalents, resale agreements,
fixed maturities, equity securities, partnership interests, the
Company's remaining real estate holdings and certain other
investments. Information by business segment for the years ended
December 31, 1998, 1997 and 1996 is as follows:
-69-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 18. SEGMENT REPORTING (CONTINUED)
1998 1997 1996
-----------------------------------
(IN THOUSANDS)
REVENUES:
Medical Stop-Loss..........$ 26,855 $ 23,836 $ 24,502
DBL........................ 21,439 22,201 17,039
Group Term Disability and
Term Life................. 10,212 8,239 7,315
Credit Life and Disability. 22,198 20,295 12,643
Managed Health Care........ 2,082 5,475 4,467
Special Disability......... 235 78 12
Acquired Blocks
/Other Business........... 22,864 22,495 21,557
Corporate.................. 2,716 3,599 1,619
Net Realized and Unrealized
Gains..................... 2,013 539 190
------- ------- -------
$110,614 $106,757 $ 89,344
======= ======= =======
OPERATING INCOME FROM
CONTINUING OPERATIONS:
Medical Stop-Loss..........$ 17 $ 2,047 $ 4,042
DBL........................ 4,200 1,269 1,035
Group Term Disability and
Term Life................. 1,041 779 532
Credit Life and Disability. 1,458 2,434 1,105
Managed Health Care........ 1,078 1,072 938
Special Disability......... 742 344 (12)
Acquired Blocks
/Other Business............ 4,218 4,255 2,139
Corporate.................. (357) 549 (3,149)
------- ------- -------
12,397 12,749 6,630
Net Realized and Unrealized
Gains..................... 2,013 539 190
------- ------- -------
$ 14,410 $ 13,288 $ 6,820
======= ======= =======
IDENTIFIABLE ASSETS AT YEAR-END:
Medical Stop-Loss..........$ 18,628 $ 8,153 $ 9,936
DBL........................ 17,016 5,692 7,474
Group Term Disability and
Term Life................. 12,561 11,227 8,653
Credit Life and Disability. 39,485 59,579 21,859
Managed Health Care........ 9,638 3,995 3,133
Special Disability......... 1,239 173 51
Acquired Blocks
/Other Business............ 381,896 348,163 268,827
Corporate.................. 19,849 17,756 16,468
------- ------- -------
$500,312 $454,738 $336,401
======= ======= =======
-70-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 19. DIVIDEND RESTRICTIONS ON INSURANCE SUBSIDIARIES
Dividends from Madison Life are subject to the prior
notification to the Wisconsin Insurance Commissioner if such
dividend distribution exceeds 115% of the distribution for the
corresponding period of the previous year. In addition, if such
dividends, together with the fair market value of other dividends
paid or credited and distributions made within the preceding
twelve months, exceed the lesser of total net gain from
operations for the preceding calendar year minus realized capital
gains for that calendar year or 10% of surplus with regard to
policyholders as of December 31 of the preceding year, such
dividends may be paid so long as such dividends have not been
disapproved by the Wisconsin Insurance Commissioner within 30
days of its receipt of notice thereof. No dividends were paid by
Madison Life in 1998 or 1997. The payment of dividends by
Standard Life to its parent, Madison Life, requires prior
approval of the New York Superintendent of Insurance and is
limited by net income and capital and surplus. Dividends from
First Standard to its parent, a subsidiary of Standard Life, are
subject to the prior notification to the Delaware Insurance
Commissioner. If such dividends, together with the fair market
value of other dividends or distributions made within the
preceding twelve months, exceed the greater of (i) 10% of surplus
as regards policyholders as of the preceding December 31 and (ii)
net income, not including realized capital gains, for
the twelve-month period ending the 31st day of December next
preceding, such dividends may be paid so long as they have not
been disapproved by the Delaware Insurance Commissioner within 30
days of its receipt of notice thereof. First Standard declared
and paid dividends of $2,450,000 and $2,340,000 in 1998 and 1997,
respectively. Under Delaware law, IHC is permitted to pay
dividends from surplus or net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year.
IHC declared dividends of $368,000, $372,000 and $371,000 in
1998, 1997 and 1996 respectively.
Combined net income of the Insurance Group, as determined in
accordance with statutory accounting practices, was $381,000,
$5,706,000 and $4,378,000 for 1998, 1997 and 1996, respectively.
Statutory capital and surplus for the Insurance Group was
$59,699,000 and $59,438,000 at December 31, 1998 and 1997,
respectively.
-71-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 20. QUARTERLY DATA (UNAUDITED)
The quarterly results of operations for the years ended
December 31, 1998 and 1997 are summarized below:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
- ----
Total Revenues........$ 28,278 $ 28,227 $ 26,108 $ 28,001
======= ======= ======= =======
Net income............$ 2,491 $ 2,947 $ 2,688 $ 2,931
======= ======= ======= =======
Net Income Per Common
Share - Basic.........$ .34 $ .40 $ .36 $ .40
======= ======= ======= =======
Net Income Per Common
Share - Diluted......$ .33 $ .39 $ .36 $ .39
======= ======= ======= =======
1997
- ----
Total Revenues........$ 24,404 $ 24,927 $ 29,206 $ 28,220
======= ======= ======= =======
Net income............$ 2,260 $ 3,191 $ 2,825 $ 2,911
======= ======= ======= =======
Net Income Per Common
Share - Basic.........$ .30 $ .43 $ .38 $ .39
======= ======= ======= =======
Net income Per Common
Share - Diluted.......$ .30 $ .43 $ .37 $ .39
======= ======= ======= =======
-72-
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
_________________________________________________________________
NOTE 21. 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.
Reclassifications related to comprehensive income for the
years ended December 31, 1998, 1997 and 1996 are as follows:
Before Tax Expense Net of
Tax (Benefit) Tax
------------------------------
(in thousands)
1998
- ----
Unrealized holding gains,
arising during the period.......$ 3,774 $ 907 $ 2,867
Less:
Gains included in net income.... 2,013 485 1,528
Deferred acquisition costs...... 588 - 588
------ ------ ------
Unrealized gains on securities,
net.............................$ 1,173 $ 422 $ 751
====== ====== ======
1997
- ----
Unrealized holding gains,
arising during the period.......$ 5,433 $ 1,672 $ 3,761
Less:
Gains included in net income.... 539 136 403
------ ------ ------
Unrealized gains on securities,
net.............................$ 4,894 $ 1,536 $ 3,358
====== ====== ======
1996
- ----
Unrealized holding losses,
arising during the period.......$(2,584) $ (835) $(1,749)
Less:
Gains included in net income.... 190 (22) 212
------ ------ ------
Unrealized losses on securities,
net.............................$(2,774) $ (813) $(1,961)
====== ====== ======
NOTE 22. SUBSEQUENT EVENT
Subsequent to December 31, 1998, a subsidiary of IHC signed
a commitment letter to secure a $30,000,000 line of credit to
replace the existing $10,000,000 line of credit, with terms and
conditions similar to the existing line of credit, for general
corporate purposes including acquisitions.
-73-
<PAGE>
SCHEDULE I
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
DECEMBER 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT
SHOWN ON
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------ ---- ----- -----
FIXED MATURITIES:
BONDS:
United States
Government and
authorities...........$171,304,000 $174,529,000 $174,529,000
States, municipalities
and political
subdivisions.......... 2,346,000 2,294,000 2,294,000
Public utilities....... 30,834,000 31,511,000 31,511,000
All other corporate
securities............ 11,638,000 11,696,000 11,696,000
----------- ----------- -----------
TOTAL FIXED
MATURITIES........... 216,122,000 220,030,000 220,030,000
----------- ----------- -----------
EQUITY SECURITIES:
COMMON STOCKS:
Industrial,
miscellaneous and
other................. 11,961,000 12,660,000 12,660,000
NON-REDEEMABLE PREFERRED
STOCK................... 4,339,000 4,344,000 4,344,000
----------- ----------- -----------
TOTAL EQUITY SECURITIES. 16,300,000 17,004,000 17,004,000
----------- ----------- -----------
FINANCIAL INSTRUMENTS
SOLD, BUT NOT YET
PURCHASED:
EQUITY SECURITIES:
COMMON STOCKS:
Industrial,
miscellaneous and
other.............. (386,000) (458,000) (458,000)
----------- ---------- ----------
(CONTINUED)
-74-
<PAGE>
SCHEDULE I
(CONTINUED)
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT
SHOWN ON
BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------ ---- ----- -----
Securities purchased
under agreements to
resell................... 11,681,000 11,681,000 11,681,000
Partnership interests..... 37,310,000 37,310,000 37,310,000
Mortgage loans............ 245,000 245,000 245,000
Policy loans.............. 12,390,000 12,390,000 12,390,000
Other..................... 2,246,000 2,246,000 2,246,000
Short-term investments.... 25,250,000 25,250,000 25,250,000
----------- ----------- -----------
TOTAL INVESTMENTS....$321,158,000 $325,698,000 $325,698,000
=========== =========== ===========
-75-
<PAGE>
SCHEDULE III
INDEPENDENCE HOLDING COMPANY
BALANCE SHEETS
(PARENT COMPANY ONLY)
DECEMBER 31,
1998 1997
ASSETS: -----------------------
Cash and cash equivalents.............$ 1,262,000 $ 783,000
Securities purchased under
agreements to resell................. 1,420,000 85,000
Equity securities..................... 1,304,000 844,000
Other investments..................... 10,310,000 10,831,000
Investments in consolidated
subsidiaries......................... 76,347,000 81,800,000
Amounts due from consolidated
subsidiaries......................... 29,127,000 5,581,000
Other assets.......................... 23,000 28,000
----------- -----------
TOTAL ASSETS......................$119,793,000 $ 99,952,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and other
liabilities.........................$ 4,507,000 $ 4,254,000
Income taxes payable................. 2,949,000 2,524,000
Amounts due to consolidated
subsidiaries........................ 2,442,000 1,797,000
Dividends payable.................... 368,000 372,000
----------- -----------
TOTAL LIABILITIES................. 10,266,000 8,947,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (none issued)......... - -
Common stock, 7,367,000 and 7,430,169
shares issued and outstanding,
respectively, net of 2,249,019 and
2,188,950 shares in treasury,
respectively......................... 7,367,000 7,430,000
Paid-in capital....................... 83,191,000 76,046,000
Unrealized gains on investments, net.. 2,643,000 1,892,000
Retained Earnings..................... 16,326,000 5,637,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........ 109,527,000 91,005,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............$119,793,000 $ 99,952,000
=========== ===========
See Notes to Parent Company Only Financial Statements.
(CONTINUED)
-76-
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF OPERATIONS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------------------------------------
REVENUES:
Net investment
income.................$ 4,245,000 $ 2,347,000 $ 400,000
Other income............ 782,000 683,000 497,000
---------- ---------- ----------
5,027,000 3,030,000 897,000
---------- ---------- ----------
EXPENSES:
General and adminis-
trative expenses....... 890,000 2,786,000 3,075,000
---------- ---------- ----------
Income (loss) before
income tax benefit...... 4,137,000 244,000 (2,178,000)
Income tax expense
(benefit)............... 176,000 (1,771,000) (2,534,000)
---------- ---------- ----------
Income before
equity in net income
of subsidiaries and
discontinued operations. 3,961,000 2,015,000 356,000
Equity in net income of
subsidiaries............ 7,096,000 9,172,000 6,354,000
Income from discontinued
operations, net......... - - 1,048,000
---------- ---------- ----------
Net income...............$11,057,000 $11,187,000 $ 7,758,000
========== ========== ==========
See Notes to Parent Company Only Financial Statements.
(CONTINUED)
-77-
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1998 1997 1996
CASH FLOWS FROM OPERATING ------------------------------------
ACTIVITIES:
Net income...............$ 11,057,000 $ 11,187,000 $ 7,758,000
Adjustments to reconcile
net income to net cash
used by operating
activities:
Equity in net income
of subsidiaries........ (7,096,000) (9,172,000) (6,354,000)
Income from dis-
continued operations,
net.................... - - (1,048,000)
Change in other assets
and liabilities........ (31,572,000) (3,444,000) (3,825,000)
----------- ----------- -----------
Net cash used
by operating
activities.......... (27,611,000) (1,429,000) (3,469,000)
----------- ----------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES...............
Decrease in investment in
and advances to
consolidated
subsidiaries............ 5,039,000 4,710,000 4,457,000
Purchases of equity
securities.............. (433,000) (829,000) -
Additional investments
in other investments,
net of distributions.... 24,679,000 (1,724,000) (483,000)
----------- ----------- -----------
Net cash provided by
investing activities.... 29,285,000 2,157,000 3,974,000
----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Repurchase of common
stock and warrants...... (878,000) (24,000) (5,000)
Exercise of common
stock options........... 55,000 - -
Dividends paid........... (372,000) (372,000) (298,000)
----------- ----------- -----------
Net cash used by
financing activities.... (1,195,000) (396,000) (303,000)
----------- ----------- -----------
(CONTINUED)
-78-
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
STATEMENTS OF CASH FLOWS
(PARENT COMPANY ONLY)
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------------------------------
Increase in cash
and cash equivalents.... 479,000 332,000 202,000
Cash and cash
equivalents, beginning
of year................ 783,000 451,000 249,000
----------- ----------- -----------
Cash and cash
equivalents, end of
year....................$ 1,262,000 $ 783,000 $ 451,000
=========== =========== ===========
See Notes to Parent Company Only Financial Statements.
-79-
<PAGE>
SCHEDULE III
(CONTINUED)
INDEPENDENCE HOLDING COMPANY
NOTES TO PARENT COMPANY ONLY FINANCIAL STATEMENTS
NOTES:
(A) In connection with the distribution of Zimmerman Sign
Company, two subsidiaries of IHC were merged into IHC during
1996.
(B) Cash payments for taxes were $3,007,000, $861,000 and
$955,000 in 1998, 1997 and 1996, respectively.
(C) The financial information of Independence Holding Company
(Parent Company Only) should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
-80-
<PAGE>
<TABLE>
SCHEDULE V
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FUTURE
POLICY NET AMORTIZ-
LIABILITIES INVESTMENT ATION OF
CLAIMS INCOME AND DEFERRED
DEFERRED & OTHER GAINS, INSURANCE OTHER
INSURANCE POLICY- AND OTHER BENEFITS ACQUIS- OPERATING
ACQUISITION HOLDERS' UNEARNED PREMIUMS INCOME AND ITION EXPENSES PREMIUMS
COSTS FUNDS PREMIUMS EARNED (1) CLAIMS COSTS (2) WRITTEN
DECEMBER 31, 1998:
Life and
annuity.....$ 9,607 $167,715 $ 10,162 $ 19,944 $ 15,852 $ 18,028 $ 2,646 $ 7,066 $ 17,548
Health....... 4,640 139,747 10,867 60,714 11,583 41,603 2,660 21,131 57,264
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 14,247 $307,462 $ 21,029 $ 80,658 $ 27,435 $ 59,631 $ 5,306 $ 28,197 $ 74,812
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1997:
Life and
annuity.....$ 7,950 $145,321 $ 13,326 $ 16,411 $ 11,708 $ 12,722 $ 1,675 $ 6,966 $ 18,420
Health....... 5,661 104,878 14,567 65,790 9,322 45,839 1,906 21,322 70,205
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 13,611 $250,199 $ 27,893 $ 82,201 $ 21,030 $ 58,561 $ 3,581 $ 28,288 $ 88,625
======= ======= ======= ======= ======= ======= ======= ======= =======
DECEMBER 31, 1996:
Life and
annuity.....$ 7,082 $126,129 $ 3,874 $ 13,155 $ 11,241 $ 13,113 $ 2,416 $ 5,793 $ 12,879
Health....... 4,139 64,495 7,780 56,430 7,525 36,675 1,403 18,939 56,035
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 11,221 $190,624 $ 11,654 $ 69,585 $ 18,766 $ 49,788 $ 3,819 $ 24,732 $ 68,914
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Net investment income is allocated between product lines based on the mean reserve method.
(2) Direct operating expenses are specifically identified and charged to product lines. Indirect
expenses are allocated based on time studies, however, other acceptable methods of allocation
might produce different results.
-81-
</TABLE>
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number
3(i) Restated Certificate of Incorporation of
Independence Holding Company.**
3(ii) By-laws of Independence Holding Company.*
4(i) Form of Warrant Certificate to purchase shares
of Common Stock of Independence Holding Company,
expiring June 30, 2001.*
10(iii)(A) Executive Compensation Plans and Agreements
(1) Independence Holding Company 1988 Stock
Incentive Plan***
(2) Form of Independence Holding Company
Stock Option Agreement****
(3) Deferred Compensation Agreement*****
(4) Retirement Benefit Agreements*****
(5) Amendment No. 1 to 1988 Stock Incentive Plan******
11 Statement re: computation of per share earnings for
the years ended December 31, 1998, 1997 and 1996.
21 Principal subsidiaries of Independence Holding Company,
as of March 22, 1999.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
99 Financial Statements of significant 50% or less owned person.
*Such exhibit is incorporated by reference to the Report on Form
10-K for the fiscal year ended December 31, 1987, as amended, of
Independence Holding Company.
**Such exhibit is incorporated by reference to the Report on Form
10-Q for the quarter ended June 30, 1996 of Independence Holding
Company.
***Such exhibit is incorporated by reference to the Proxy
Statement for the Annual Meeting of Stockholders held on May 25,
1989 of Independence Holding Company.
****Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1988 of
Independence Holding Company.
*****Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1993 of
Independence Holding Company.
******Such exhibit is incorporated by reference to the Report on
Form 10-K for the fiscal year ended December 31, 1997 of
Independence Holding Company.
Exhibits will be furnished upon request for a reasonable fee.
-82-
<PAGE>
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
Year Ended December 31,
1998 1997 1996
INCOME: ------------------------------
Income from continuing
operations....................$ 11,057 $ 11,187 $ 6,710
Income from discontinued
operations, net............... - - 1,048
------- ------- -------
Net income.....................$ 11,057 $ 11,187 $ 7,758
======= ======= =======
SHARES:
Weighted average common
shares outstanding........... 7,415 7,431 7,432
======= ======= =======
BASIC INCOME PER SHARE:
Income per share from
continuing operations..........$ 1.49 $ 1.51 $ .90
Income per share from
discontinued operations........ - .14
------- ------- -------
Net income per share............$ 1.49 $ 1.51 $ 1.04
======= ======= =======
DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of options....$ 2,474 $ 2,512 2,092
Tax benefit from exercise
of options.................... 852 388 -
Repurchase of treasury stock at
average market price of $13.48,
$9.67 and $8.29, respectively. (3,326) (2,900) (2,092)
------- ------- -------
Assumed balance to be invested.$ - $ - $ -
======= ======= =======
SHARES:
Weighted average shares
outstanding.................... 7,415 7,431 7,432
Shares assumed issued for
options........................ 370 378 306
Treasury stock assumed
purchased...................... (247) (300) (252)
------- ------- -------
Adjusted average shares
outstanding.................... 7,538 7,509 7,486
======= ======= =======
DILUTED INCOME PER SHARE:
Income per share from
continuing operations..........$ 1.47 $ 1.49 $ .90
Income per share from
discontinued operations........ - .14
------- ------- -------
Net income per share............$ 1.47 $ 1.49 $ 1.04
======= ======= =======
(A) Warrants were not assumed to be exercised as the effect
would have been anti-dilutive.
EXHIBIT 21
INDEPENDENCE HOLDING COMPANY
Subsidiaries as of March 22, 1999
---------------------------------
Subsidiary Jurisdiction
- ---------- ------------
Independence Capital Corp. Delaware
Independence Financial Services Corp. Delaware
Madison National Life Insurance
Company, Inc. Wisconsin
Madison Investors Corporation Delaware
Credico Corporation North Carolina
Credico Life Insurance Company Nevis
SAR Holdings, L.P. Delaware
Risk Assessment Strategies, Inc. Delaware
Standard Security Life Insurance
Company of New York New York
Standard Security Investors Corp. New York
Standard Life Asset Management Corp. New York
SSH Corp. Delaware
First Standard Security
Insurance Company Delaware
Madison Standard Corp. Wisconsin
Independence Land and Capital, Inc. Delaware
R.H. Financial Corp. Delaware
Incopoint Limited Partnership Connecticut
Copoint L.P. Delaware
IFS Corp. Delaware
G.P. Associates Holding Corp. Delaware
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INDEPENDENCE HOLDING COMPANY:
We consent to incorporation by reference in the registration
statements (No. 33-23302) on Form S-8 and (No. 2-40517-99) on
Form S-3 of Independence Holding Company and subsidiaries of our
report dated March 11, 1999, relating to the consolidated balance
sheets of Independence Holding Company and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated
statements of operations, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended
December 31, 1998, and the related financial statement schedules,
which report appears in the 1998 annual report on Form 10-K of
Independence Holding Company and subsidiaries.
KPMG LLP
New York, New York
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-K for the twelve months ended December 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000701869
<NAME> INDEPENDENCE HOLDING COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 220,030,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 17,004,000
<MORTGAGE> 245,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 325,698,000
<CASH> 7,889,000
<RECOVER-REINSURE> 128,425,000
<DEFERRED-ACQUISITION> 14,247,000
<TOTAL-ASSETS> 500,312,000
<POLICY-LOSSES> 241,594,000
<UNEARNED-PREMIUMS> 21,029,000
<POLICY-OTHER> 62,498,000
<POLICY-HOLDER-FUNDS> 3,370,000
<NOTES-PAYABLE> 0
0
0
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80,658,000
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