FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: JUNE 30, 1999
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Commission File Number: 0-10306
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INDEPENDENCE HOLDING COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 58-1407235
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(State of Incorporation) (I.R.S. Employer Identification No.)
96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203)358-8000
NOT APPLICABLE
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Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X. No .
7,208,000 SHARES OF COMMON STOCK, $1.00 PAR VALUE
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Common stock outstanding as of August 12, 1999
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Consolidated Balance Sheets -
June 30, 1999(unaudited)and December 31, 1998.. 3
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1999
and 1998(unaudited)............................. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999
and 1998(unaudited)............................. 5
Notes to Consolidated Financial Statements
(unaudited)...................................... 6 - 12
Management's Discussion and Analysis of Results
of Operations and Financial Condition........... 13 - 22
PART II - OTHER INFORMATION
- ---------------------------
Item 4 - Submission of Matters to a Vote of
Security Holders........................ 23
Item 6 - Exhibits and Reports on Form 8-K........ 23
Signature........................................ 24
2
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS JUNE 30, DECEMBER 31,
1999 1998
- -------------------------------------------------------------------
ASSETS: (UNAUDITED)
Cash and cash equivalents.............$ 4,107,000 $ 7,889,000
Investments:
Short-term investments............... 8,140,000 25,250,000
Securities purchased under
agreements to resell................ 11,910,000 11,681,000
Fixed maturities..................... 229,015,000 220,030,000
Equity securities.................... 24,863,000 17,004,000
Other investments.................... 53,914,000 52,191,000
----------- -----------
Total investments................. 327,842,000 326,156,000
Deferred policy acquisition costs..... 15,137,000 14,247,000
Due and unpaid premiums............... 14,759,000 10,313,000
Due from reinsurers................... 129,030,000 128,425,000
Notes and other receivables........... 2,333,000 3,844,000
Other assets.......................... 10,221,000 9,438,000
----------- -----------
TOTAL ASSETS......................$503,429,000 $500,312,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Future policy liabilities.............$219,134,000 $217,920,000
Unearned premiums..................... 19,724,000 21,029,000
Funds on deposit...................... 78,131,000 80,792,000
Insurance policy claims............... 5,563,000 5,380,000
Other policyholders' funds............ 3,619,000 3,370,000
Financial instruments sold, but
not yet purchased.................... 264,000 458,000
Due to brokers........................ 28,993,000 18,933,000
Due to reinsurers..................... 18,720,000 14,320,000
Accounts payable, accruals and
other liabilities.................... 16,063,000 21,235,000
Income taxes.......................... 5,729,000 7,348,000
----------- -----------
TOTAL LIABILITIES................. 395,940,000 390,785,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (none issued)......... - -
Common stock, 7,289,100 and 7,367,000
shares issued and outstanding, net
of 2,329,419 and 2,249,019 shares in
treasury, respectively............... 7,289,000 7,367,000
Paid-in capital....................... 82,289,000 83,191,000
Accumulated other comprehensive
(loss) income:
Unrealized (losses) gains on
investments, net.................... (3,570,000) 2,643,000
Retained earnings .................... 21,481,000 16,326,000
----------- -----------
TOTAL STOCKHOLDERS' EQUITY........ 107,489,000 109,527,000
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY.............$503,429,000 $500,312,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
3
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------
REVENUES:
Premiums earned......$18,887,000 $19,839,000 $39,097,000 $40,898,000
Net investment
income.............. 6,495,000 6,331,000 12,145,000 12,252,000
Net realized and
unrealized gains
(losses)............ (259,000) 200,000 173,000 413,000
Equity income (loss). 98,000 30,000 90,000 (37,000)
Other income......... 2,106,000 1,827,000 4,316,000 2,979,000
---------- ---------- ---------- ----------
27,327,000 28,227,000 55,821,000 56,505,000
---------- ---------- ---------- ----------
EXPENSES:
Insurance benefits,
claims and reserves. 14,459,000 14,760,000 29,065,000 31,147,000
Amortization of
deferred acquisition
costs............... 1,234,000 1,284,000 2,491,000 2,476,000
Selling, general and
administrative
expenses............ 8,158,000 8,328,000 17,047,000 15,933,000
---------- ---------- ---------- ----------
23,851,000 24,372,000 48,603,000 49,556,000
---------- ---------- ---------- ----------
Operating income
before income taxes. 3,476,000 3,855,000 7,218,000 6,949,000
Income tax expense... 764,000 908,000 2,063,000 1,511,000
---------- ---------- ---------- ----------
NET INCOME............$ 2,712,000 $ 2,947,000 $ 5,155,000 $ 5,438,000
========== ========== ========== ==========
BASIC INCOME PER
COMMON SHARE.........$ .37 $ .40 $ .70 $ .73
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING... 7,308,000 7,435,000 7,335,000 7,433,000
========== ========== ========== ==========
DILUTED INCOME PER
COMMON SHARE.........$ .37 $ .39 $ .69 $ .72
========== ========== ========== ==========
WEIGHTED AVERAGE DILUTED
SHARES OUTSTANDING.... 7,416,000 7,576,000 7,451,000 7,565,000
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
4
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 1998
- ---------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 5,155,000 $ 5,438,000
Adjustments to reconcile net income to
net cash (used) provided by operating
activities:
Amortization of deferred policy
acquisition costs...................... 2,491,000 2,476,000
Realized gains on sales of investments.. (173,000) (334,000)
Unrealized gains on trading securities.. - (79,000)
Equity (income) loss ................... (90,000) 37,000
Depreciation............................ 302,000 241,000
Deferred tax expense.................... 407,000 528,000
Other................................... (478,000) (50,000)
Changes in assets and liabilities:
Net purchases of trading securities..... (582,000) (277,000)
Change in future policy liabilities,
claims and other policy liabilities.... (1,454,000) 50,279,000
Additions to deferred policy
acquisition costs...................... (1,769,000) (9,644,000)
Change in net amounts due from and to
reinsurers............................. 3,795,000 (9,696,000)
Change in income tax liability.......... (539,000) (1,023,000)
Change in due and unpaid premiums....... (4,447,000) (3,879,000)
Other................................... (3,463,000) (62,000)
----------- -----------
Net cash (used) provided by
operating activities............... (845,000) 33,955,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in net amount due from and to
brokers................................. 10,319,000 (32,789,000)
Sales and maturities of short-term
investments............................. 48,919,000 49,046,000
Purchases of short-term investments...... (31,781,000) (44,067,000)
Net (purchases) sales of resale
agreements.............................. (229,000) 19,586,000
Sales and maturities of fixed maturities. 225,502,000 62,813,000
Purchases of fixed maturities............ (244,449,000) (69,389,000)
Sales of equity securities............... 26,717,000 15,046,000
Purchases of equity securities........... (32,959,000) (23,375,000)
Proceeds on sales of other investments... 3,794,000 6,205,000
Additional investments in other
investments, net of distributions....... (5,425,000) (34,726,000)
Other.................................... (1,131,000) (633,000)
----------- -----------
Net cash used by investing
activities......................... (723,000) (52,283,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options......... 21,000 55,000
Repurchase of common stock and warrants.. (1,001,000) (1,000)
Payments of investment-type insurance
contracts............................... (866,000) (868,000)
Dividends paid........................... (368,000) (372,000)
----------- -----------
Net cash used by financing
activities........................ (2,214,000) (1,186,000)
----------- -----------
Decrease in cash and cash equivalents.... (3,782,000) (19,514,000)
Cash and cash equivalents, beginning
of year................................. 7,889,000 23,028,000
----------- -----------
Cash and cash equivalents, end of period. $ 4,107,000 $ 3,514,000
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
5
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1. SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) BUSINESS AND ORGANIZATION
Independence Holding Company ("IHC") is a holding company
engaged principally in the life and health insurance business
through its wholly-owned subsidiaries, Standard Security Life
Insurance Company of New York ("Standard Life"), Madison National
Life Insurance Company, Inc. ("Madison Life") and First Standard
Security Insurance Company ("First Standard") and their
subsidiaries (collectively, the "Insurance Group"). IHC and its
subsidiaries (including the Insurance Group) are collectively
referred to as the "Company".
Geneve Corporation, a diversified financial holding company,
and its affiliated entities hold approximately 57% of IHC's
outstanding common stock.
(B) PRINCIPLES OF CONSOLIDATION AND PREPARATION OF
FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in
accordance with the requirements for quarterly reports on Form 10-
Q. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) that are necessary for a fair
presentation of the consolidated results of operations for the
interim periods have been included. The consolidated results of
operations for the three months and six months ended June 30,
1999 are not necessarily indicative of the results to be
anticipated for the entire year. The consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes included in IHC's Annual
Report on Form 10-K for the year ended December 31, 1998. Certain
amounts in the prior year's consolidated financial statements and
notes thereto have been restated to conform to the 1999
presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect:(i) the reported
amounts of assets and liabilities;(ii) the disclosure of
contingent assets and liabilities at the date of the financial
statements; and (iii) the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
6
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 2. OTHER INVESTMENTS
The Company had invested $19,905,000 and $16,986,000 at June
30, 1999 and 1998, respectively, in Dolphin Limited Partnership-A
("DLP-A"), a limited partnership which invests in relatively
"market neutral" strategies, such as merger arbitrage,
convertible arbitrage and distressed situations. The condensed
statements of operations for DLP-A for the three months and six
months ended June 30, 1999 and 1998 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
1999 1998 1999 1998
------------------ ----------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues...........$ 3,970 $ 1,099 $ 6,522 $ 3,177
Net income.........$ 2,906 $ 599 $ 4,768 $ 2,100
IHC's share of
net income........$ 1,034 $ 275 $ 1,745 $ 928
NOTE 3. 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:
JUNE 30, 1999
-----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
-----------------------------------------
(IN THOUSANDS)
FIXED MATURITIES
- ----------------
AVAILABLE-FOR-SALE:
Corporate securities...$ 49,642 $ 39 $(1,702) $ 47,979
Collaterized mortgage
obligations ("CMO's")
and asset backed
securities............ 34,731 - (686) 34,045
U.S. Government and
agencies obligations.. 60,928 57 (1,932) 59,053
GNMA's................. 86,608 67 (1,146) 85,529
Obligations of states
and political
subdivisions.......... 2,544 43 (178) 2,409
------- ------ ------ -------
Total fixed maturities..$234,453 $ 206 $(5,644) $229,015
======= ====== ====== =======
EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stock...........$ 18,491 $ 1,345 $ (413) $ 19,423
Options................ 143 - (93) 50
Preferred stock........ 4,740 61 (48) 4,753
------- ------ ------ -------
23,374 1,406 (554) 24,226
7
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
JUNE 30, 1999
----------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
----------------------------------------
(IN THOUSANDS)
TRADING:
Common stock........... 749 177 (289) 637
------- ------ ------ ------
Total equity securities.$ 24,123 $ 1,583 $ (843) $24,863
======= ====== ====== ======
FINANCIAL INSTRUMENTS SOLD,
BUT NOT YET PURCHASED
- ---------------------
TRADING:
Common stock...........$ (74) $ 4 $ - $ (70)
Options................ (143) 23 (74) (194)
------- ------ ------ ------
Total Financial.........$ (217) $ 27 $ (74) $ (264)
======= ====== ====== ======
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)
======= ====== ====== =======
8
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------------------------------
NOTE 3. INVESTMENT SECURITIES (CONTINUED)
The amortized cost and fair value of fixed maturities at
June 30, 1999, 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 mortgage and asset backed
securities is materially less than the stated maturity.
AMORTIZED FAIR % 0F
COST VALUE FAIR VALUE
-----------------------------------
(IN THOUSANDS)
Due after one year through
five years..................$ 24,282 $ 23,788 10.4%
Due after five years through
ten years................... 45,438 44,601 19.5%
Due after ten years.......... 43,394 41,052 17.9%
------- ------- -----
113,114 109,441 47.8%
CMO's and asset backed
securities.................. 34,731 34,045 14.9%
GNMA's - 30 year............. 86,608 85,529 37.3%
------- ------- -----
$234,453 $229,015 100.0%
======= ======= =====
The average fair value of trading options and futures
contract sold, but not yet purchased was $111,000 and $85,000 for
1999 and 1998, respectively.
Gross gains of $3,813,000 and gross losses of $3,661,000
were realized on sales of available-for-sale securities for the
six months ended June 30, 1999.
Gross gains of $1,367,000 and gross losses of $850,000 were
realized on sales of available-for-sale securities for the six
months ended June 30, 1998.
NOTE 4. INCOME PER COMMON SHARE
Included in the diluted earnings per share calculation for
1999 and 1998, respectively, are 108,000 and 141,000 shares for
the three months ended June 30, 1999 and 1998 and 116,000 and
132,000 shares for the six months ended June 30, 1999 and 1998
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 income per share because the strike price
of the warrants was greater than the average market price of the
common shares during the three months and six months ended June
30, 1999 and 1998.
9
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INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------------------------------
NOTE 5. INCOME TAXES
The provision for income taxes shown in the consolidated
statements of operations was computed based on the Company's
estimate of the effective tax rates expected to be applicable for
the current year, including the expected tax impact of the
life/nonlife consolidation.
The income tax benefit for the six months ended June 30,
1999 allocated to stockholders' equity for unrealized gains on
investment securities was $1,487,000, representing the change in
deferred tax (benefit) liability of ($21,000) at June 30, 1999
from $1,466,000 at December 31, 1998.
Cash payments for income taxes were $1,639,000 and
$2,022,000 for the six months ended June 30, 1999 and 1998,
respectively.
NOTE 6. COMPREHENSIVE (LOSS) INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive
Income, effective January 1, 1998. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income
and its components. The components of comprehensive income
include net income and certain amounts previously reported
directly in equity.
Comprehensive (loss) income for the three months and six
months ended June 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
1999 1998 1999 1998
------------------ ----------------
(IN THOUSANDS) (IN THOUSANDS)
Net income................$ 2,712 $ 2,947 $ 5,155 $ 5,438
Unrealized (losses)
gains, on securities,
net of reclassification.. (3,783) 624 (6,213) 808
------ ------ ------ ------
Comprehensive (loss)
income..............$(1,071) $ 3,571 $(1,058) $ 6,246
====== ====== ====== ======
10
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -----------------------------------------------------------------
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The requirements for SFAS No. 133 were
delayed by SFAS No. 137, "Deferral of the Effective Date of FASB
Statement No. 133," and are now effective for financial
statements for periods beginning after June 15, 2000. 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 measure those instruments at
fair value. The Company is currently evaluating the impact of
SFAS No. 133 but does not expect it to have a material impact on
the Company.
NOTE 8. 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. Information by business segment for the three
months and six months ended June 30, 1999 and 1998 is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
1999 1998 1999 1998
------------------ ----------------
(IN THOUSANDS) (IN THOUSANDS)
REVENUES:
Medical Stop-Loss........$ 7,043 $ 7,350 $13,894 $13,091
DBL...................... 4,813 5,640 10,313 11,054
Group Term Disability and
Term Life............... 3,292 2,408 6,351 4,811
Credit Life and
Disability.............. 5,291 5,969 10,376 12,228
Managed Health Care...... 682 (268) 1,309 1,188
Special Disability....... 27 61 43 112
Acquired Blocks
/Other Business......... 5,557 6,318 11,850 12,376
Corporate................ 881 549 1,512 1,232
------ ------ ------ ------
27,586 28,027 55,648 56,092
Net Realized and
Unrealized (Losses)
Gains................... (259) 200 173 413
------ ------ ------ ------
$27,327 $28,227 $55,821 $56,505
====== ====== ====== ======
11
<PAGE>
INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------------
NOTE 8. SEGMENT REPORTING (CONTINUED)
OPERATING INCOME:
Medical Stop-Loss........$ 433 $ 970 $ (262) $ 1,573
DBL...................... 759 728 2,204 906
Group Term Disability and
Term Life............... 225 (244) 35 (196)
Credit Life and
Disability.............. 834 668 1,438 1,607
Managed Health Care...... 195 66 856 352
Special Disability....... (25) 261 191 440
Acquired Blocks
/Other Business......... 1,188 1,275 2,512 1,946
Corporate................ 126 (69) 71 (92)
------ ------ ------ ------
3,735 3,655 7,045 6,536
Net Realized and
Unrealized (Losses)
Gains................... (259) 200 173 413
------ ------ ------ ------
$ 3,476 $ 3,855 $ 7,218 $ 6,949
====== ====== ====== ======
12
<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) and
expense items associated with parent company activities
(including the Company's remaining real estate holdings) are
included in Corporate.
RESULTS OF OPERATIONS
---------------------
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998
- ---------------------------------------------------------------
The Company's operating income decreased $.4 million to $3.5
million for the period ended June 30, 1999 from $3.9 million for
the same period in 1998. The Company had net realized and
unrealized losses of $.3 million in 1999 and gains of $.2 million
in 1998. Decisions to sell securities are based on cash flow
needs, investment opportunities and economic and market
conditions, thus creating fluctuations in gains (losses) from
year to year. Excluding net realized and unrealized gains, the
Company had operating income of $3.7 million in 1999 and 1998.
Net income was $2.7 million, or $.37 per share, diluted, for the
quarter ended June 30, 1999 compared to $2.9 million, or $.39 per
share, diluted, for the quarter ended June 30, 1998. Income tax
expense decreased to $.8 million in 1999 from $.9 million in
1998. The effective tax rate for the quarter ended June 30, 1999
was favorably impacted by a decrease in the valuation allowance
associated with certain temporary differences.
Insurance Group
- ---------------
The Insurance Group's operating income decreased $.6 million
to $3.3 million in 1999 from $3.9 million in 1998. Operating
income includes net realized and unrealized losses of $.3 million
in 1999 compared to gains of $.2 million in 1998. Operating
income excluding net realized and unrealized gains was $3.6
million in 1999 compared to $3.7 million in 1998.
13
<PAGE>
Premium revenues decreased $1.0 million to $18.9 million in
1999; premium revenues decreased $.2 million at Madison Life and
$.8 million at Standard Life. The decrease at Madison Life is
comprised of: a $.4 million decrease in the credit lines of
business, primarily due to the runoff of acquisitions of two
single premium blocks of business effective in 1997; a $.2
million decrease in ordinary life and individual accident and
health premiums; and a $.3 million decrease in dental premiums;
such decreases are offset by: a $.5 million increase in long-term
disability ("LTD") premiums as a result of an increase in
retention on this line of business and an increase in premiums
written in 1999; and a $.2 million increase in the group term
life line of business. The decrease at Standard Life is comprised
of: a $.5 million decrease in stop-loss due to lower retention; a
$.9 million decrease in the DBL line due to terminations in 1998
resulting in a lower premium base in 1999; and a $.3 million
decrease in an accident and health reinsurance facility due to
the runoff of this business; such decreases are offset by: a $.8
million increase in its HMO reinsurance line as a result of a
recapture of an assumed block of business; and a $.1 million
increase in the group term life line of business.
Total net investment income decreased $.2 million primarily
due to lower returns on fixed maturities. The annualized return
on investments of the Insurance Group in the second quarter of
1999 was 7.0% compared to 7.2% in the second quarter of 1998.
Other income increased $.3 million due to fee income earned
by Standard Life for the stop-loss line due to an increase in
gross written premiums. Equity income from partnerships increased
$.1 million from 1998 to 1999.
Insurance benefits, claims and reserves decreased $.3
million, reflecting a decrease of $.4 million at Madison Life and
an increase of $.1 million at Standard Life. Madison Life's
decrease resulted from: a $.4 million decrease in interest
credited to universal life and annuity products due to the runoff
of policies from prior year acquisitions; a $.9 million decrease
in the credit line of business due to the runoff of acquisitions;
and a $.2 million decrease in claims and reserves in other life
and health lines of business; such decrease is offset by: a $.9
million increase in ordinary life and individual accident and
health reserves and claims; and a $.2 million increase in LTD
claims due to the increase in premiums. The change at Standard
Life is comprised of: a $.2 million increase in net reserves of
the assumed block of ordinary life and annuity business; a $.2
million increase in reserves in the closed blocks of life,
annuity and individual and group accident and health lines of
business; a $.7 million increase in HMO reinsurance reserves due
to the recapture of premiums; such increases were offset by: a .4
14
<PAGE>
million decrease in DBL claims and reserves due to improved
experience and a decrease in volume; and a $.6 million decrease
in the accident and health reinsurance facility due to the
decrease in premiums.
Amortization of deferred acquisition costs and general and
administrative expenses for the Insurance Group decreased $.4
million. Madison Life's expenses remained constant. Standard
Life's expenses decreased $.4 million. The decrease at Standard
Life is primarily due to a decrease in franchise taxes due to
lower premiums and lower rates in 1999.
Corporate
- ---------
Operating income was $.2 million for the quarter ended June
30, 1999 and was flat for the quarter ended June 30, 1998.
Operating income includes net realized and unrealized gains of
$.1 million in 1999. Operating income excluding net realized and
unrealized gains was $.1 million in 1999 and was flat in 1998.
Investment income increased $.2 million due to higher returns on
certain hedged equity investments in 1999. Selling, general and
administrative expenses increased by $.1 million.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE
30, 1998
- -----------------------------------------------------------------
The Company's operating income increased $.3 million to $7.2
million for the six months ended June 30, 1999 from $6.9 million
for the same period in 1998. The Company had net realized and
unrealized gains of $.2 million in 1999 and $.4 million in 1998.
Excluding net realized and unrealized gains, the Company had
operating income of $7.0 million in 1999 as compared to $6.5
million in 1998 which approximately consisted of: an increase in
all lines of business of $.4 million offset by a decrease in
yields on investable assets of $.1 million (see Note 8 of Notes
to Consolidated Financial Statements). Net income was $5.2
million, or $.69 per share, diluted, for the six months ended
June 30, 1999 compared to $5.4 million, or $.72 per share,
diluted, for the six months ended June 30, 1998. Income tax
expense increased to $2.1 million in 1999 from $1.5 million in
1998 (see Capital Resources).
Insurance Group
- ---------------
The Insurance Group had operating income of $7.0 million in
1999 and 1998. Operating income includes net realized and
unrealized gains of $.1 million in 1999 compared to $.3 million
in 1998. Operating income excluding net realized and unrealized
gains or losses was $6.9 million in 1999 compared to $6.7 million
in 1998.
15
<PAGE>
Premiums earned decreased $1.8 million to $39.1 million in
1999 from $40.9 million in 1998; premiums earned at Madison Life
decreased $.5 million and Standard Life had a $1.3 million
decrease in premiums earned. The decrease at Madison Life is
comprised of: a $1.4 million decrease in the credit lines of
business primarily due to the runoff of acquisitions; and a $.4
million decrease in dental premiums due to the runoff of this
line of business; such decreases were offset by: a $1.1 million
increase in long-term disability premiums due to an increase in
retention on this block of business; and a $.2 million increase
in group term life premiums. The change at Standard Life is
comprised of: a $.8 million decrease in its DBL line due to
terminations in 1998 resulting in a lower premium base in 1999; a
$.5 million decrease in the accident and health reinsurance
facility assumed due to the runoff of this line; a $.5 million
decrease in stop-loss premiums due to decreased retention in
1999; partially offset by; a $.3 million increase in the closed
blocks of life, annuity and individual and group accident and
health lines of business due to a reinsurance adjustment in 1998;
and a $.2 million increase in group term life due to increased
production.
Total net investment income decreased $.5 million primarily
due to a decrease in yields. The annualized return on investments
of the Insurance Group in the first six months of 1999 was 6.8%
compared to 7.3% in the first six months of 1998.
Other income increased $1.3 million. Madison Life's income
increased $1.0 million primarily from 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
$.3 million due to an increase in stop-loss fee income due to
higher gross premiums. Equity income from partnerships increased
$.1 million from 1998 to 1999.
Insurance benefits, claims and reserves decreased $2.1
million, reflecting a decrease of $.7 million at Madison Life and
a $1.4 million decrease at Standard Life. Madison Life's decrease
resulted from: a $1.9 million decrease in the credit line of
business due to the runoff of acquisitions; and a $.3 million
decrease in interest credited to universal life and annuity
products; such decreases were partially offset by; a $.8 million
increase in ordinary life and individual accident and health
reserves and claims due to new blocks of business; a $.1 million
increase in group term life claims; and an increase of $.6
million in LTD claims due to the increase in premiums on this
line. The change at Standard Life is comprised of: a $.9 million
decrease in reserves on the accident and health reinsurance
16
<PAGE>
facility due to the runoff of this line; a $.5 million decrease
in the point of service line of business which reflects
reinsurance recoveries for prior year losses; and a $1.5 million
decrease in DBL claims and reserves due to improved experience
($1.0 million) and decreased volume ($.5 million); such decreases
were offset by: a $1.5 million increase in reserves in the stop-
loss line due to higher loss ratios.
Amortization of deferred policy acquisition costs and
general and administrative expenses for the Insurance Group
increased $1.0 million. Madison Life's expenses increased $1.6
million and Standard Life's expenses decreased $.6 million. The
increase at Madison Life is primarily due to $1.5 million in
general expenses from the MGU acquired on December 31, 1997 and
an increase in other general expenses of $.1 million. The
decrease at Standard Life is primarily due to a reduction in
premium taxes due to lower rates and a reduction in premiums.
Corporate
- ---------
Operating income for the six months ended June 30, 1999 was
$.2 million compared to a loss of $.1 million in 1998. Operating
income includes net realized and unrealized gains of $.1 million
in 1999 and 1998. Operating income excluding net realized and
unrealized gains was $.1 million in 1999 compared to a loss of
$.2 million in 1998. Investment income increased $.4 million due
to higher returns on certain hedged equity investments. Selling,
general and administrative expenses increased $.1 million.
LIQUIDITY
---------
Insurance Group
- ---------------
The Insurance Group normally provides cash flow from: (i)
operations; (ii) the receipt of scheduled principal payments on
its portfolio of fixed income securities; and (iii) earnings on
investments. Such cash flow is used partially to finance
liabilities for insurance policy benefits. These liabilities
represent long-term 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 75% was invested in investment
grade fixed income securities, resale agreements, policy loans
and cash and cash equivalents at June 30, 1999. Also at such
17
<PAGE>
date, approximately 96.8% of the Insurance Group's fixed
maturities were investment grade. These investments carry less
risk and, therefore, lower interest rates than other types of
fixed maturity investments. At June 30, 1999, approximately 3.2%
of the carrying value of fixed maturities was invested in
diversified non-investment grade fixed income securities
(investments in such securities have different risks than
investment grade securities, including greater risk of loss upon
default, and thinner trading markets). Less than .1% of the
carrying value of the Company's total investments was represented
by 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 futures and options to
modify the duration and average life of such assets.
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.
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
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.
18
<PAGE>
The expected change in fair value of the Company's fixed
income portfolio at June 30, 1999 given a 100 basis point rise or
decline in interest rates is not materially different than the
expected change at December 31, 1998.
Balance Sheet
The decrease in short-term investments is offset by the
increase in fixed maturities and equity securities as the Company
changed its mix of investments during 1999. Future policy
liabilities increased due to the acquisition of a block of
individual life and annuity insurance policies in January 1999 by
Standard Life. The decrease in cash is offset by a decrease in
accounts payable, accruals and other liabilities. Amounts due to
brokers increased $10.0 million due to timing of investment
trades.
The Company had net receivables from reinsurers of $110.3
million at June 30, 1999. Substantially all of the business
ceded to such reinsurers is of short duration. All of such
receivables are current and are either due from highly rated
companies or are adequately secured. Accordingly, no allowance
for doubtful accounts was necessary at June 30, 1999 and 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
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 and marketable securities) amounted to $16.7 million
at June 30, 1999. During 1999, IHC has repurchased 161,500 shares
of common stock for $1.9 million under a repurchase program
initiated in 1991.
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.
19
<PAGE>
It is anticipated that future acquisitions will be funded
internally from existing capital and surplus and parent company
liquidity including the $30.0 million credit facility.
In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, the Company may carry its portfolio
of fixed income securities either as held to maturity (carried at
amortized cost), as trading securities (carried at fair market
value) or as available-for-sale (carried at fair market value);
the Company has chosen to carry all of its debt securities as
available-for-sale. As a result of rising interest rates, the
Company experienced a decrease in unrealized gains of $6.2
million, net of deferred tax expense. Such decrease is included
in total stockholders' equity, reflecting unrealized losses of
$3.6 million at June 30, 1999 versus gains of $2.6 million at
December 31, 1998. From time to time, as warranted, the Company
employs investment strategies to mitigate interest rate and other
market exposures.
The results of the 1999 second quarter reflect a higher
effective tax rate than in the 1998 second quarter due to the
loss of tax benefits associated with the utilization of net
operating loss carryforwards which are no longer available. The
effective tax rate for the quarter ended June 30, 1999 was
favorably impacted by a decrease in the valuation allowance
associated with certain temporary differences.
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.
Most of the Company's internal software and hardware have already
been tested and are compliant, and the Company believes that all
mission critical internal systems are Year 2000 compliant. The
cost of updating the Company's mission critical systems has not
exceeded $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 MGUs have
represented that they are or will be Year 2000 compliant by
20
<PAGE>
December 31, 1999 and Madison Life's largest MGA for group life
and long-term disability has indicated that it will be compliant
by December 31, 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 materially 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
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.
21
<PAGE>
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 were delayed by SFAS No. 137, "Deferral of the Effective
Date of FASB Statement No. 133," and are now effective for
financial statements for periods beginning after June 15, 2000.
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 measure those
instruments at fair value. The Company is evaluating the
statement but does not expect it to have a material impact on the
Company.
Some of the statements included within Management's
Discussion and Analysis may be considered to be forward looking
statements which are subject to certain risks and uncertainties.
Factors which could cause the actual results to differ materially
from those suggested by such statements are described from time
to time in the Company's Annual Report on Form 10-K and other
filings with the Securities and Exchange Commission.
22
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At its Annual Meeting of Stockholders held on June 22, 1999,
the following seven nominees were re-elected for one-year
terms on the Board of Directors:
Harold E. Johnson, Allan C. Kirkman, Steven B. Lapin,
Donald T. Netter, Edward Netter, Edward J. Scheider
and Roy T.K. Thung
The vote on the election of the above nominees was:
For At least 6,765,839 shares
Withheld No more than 13,325 shares
In addition, at such meeting, the appointment of KPMG LLP as
independent auditors for 1999 was ratified by a vote of
6,770,759 shares for, 4,451 shares against, and 3,954 shares
abstaining. There were no broker nonvotes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) 1) Exhibit 10(iii)(A)(6). Form of Stock
Appreciation Rights Agreement.
2) Exhibit 11. Statement re: computation
of per share earnings.
3) Exhibit 27. Financial Data Schedule.
b) No report on Form 8-K was filed during the quarter
ended June 30, 1999.
23
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
INDEPENDENCE HOLDING COMPANY
----------------------------
(THE REGISTRANT)
Dated: August 13, 1999 By:/s/ Teresa A. Herbert
---------------------
Teresa A. Herbert
Vice President, Chief
Financial Officer and
Controller
24
EXHIBIT 11
INDEPENDENCE HOLDING COMPANY
Computation of Per Share Earnings
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
------------------ ----------------
INCOME:
Net income................$ 2,712 $ 2,947 $ 5,155 $ 5,438
======= ======= ======= =======
SHARES:
Weighted average common
shares outstanding....... 7,308 7,435 7,335 7,433
======= ======= ======= =======
BASIC INCOME PER SHARE:
Net income per share.......$ .37 $ .40 $ .70 $ .73
======= ======= ======= =======
DILUTED EARNINGS PER SHARE (A)
USE OF PROCEEDS:
Assumed exercise of
options..................$ 2,427 $ 2,690 $ 3,341 $ 2,533
Tax benefit from assumed
exercise of options...... 664 1,105 743 962
Repurchase of treasury
stock at the average
market price per share of
$11.93, $15.24, $12.45,
and $14.14, respectively. (3,091) (3,795) (4,084) (3,495)
------- ------- ------- -------
Assumed balance to be
reinvested...............$ - $ - $ - $ -
======= ======= ======= =======
SHARES:
Weighted average shares
outstanding............... 7,308 7,435 7,335 7,433
Shares assumed issued
for options............... 367 390 444 379
Treasury stock assumed
purchased................. (259) (249) (328) (247)
------- ------- ------- -------
Adjusted average shares
outstanding................ 7,416 7,576 7,451 7,565
======= ======= ======= =======
DILUTED INCOME PER SHARE:
Net income per share.......$ .37 $ .39 $ .69 $ .72
======= ======= ======= =======
(A) Warrants were not assumed to be exercised as the effect would
have been anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Independence Holding Company Form 10-Q for the six months ended June 30, 1999
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 229,015,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,863,000
<MORTGAGE> 26,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 327,842,000
<CASH> 4,107,000
<RECOVER-REINSURE> 129,030,000
<DEFERRED-ACQUISITION> 15,137,000
<TOTAL-ASSETS> 503,429,000
<POLICY-LOSSES> 219,134,000
<UNEARNED-PREMIUMS> 19,724,000
<POLICY-OTHER> 78,131,000
<POLICY-HOLDER-FUNDS> 3,619,000
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,289,000
<OTHER-SE> 100,200,000
<TOTAL-LIABILITY-AND-EQUITY> 503,429,000
39,097,000
<INVESTMENT-INCOME> 12,145,000
<INVESTMENT-GAINS> 173,000
<OTHER-INCOME> 4,316,000
<BENEFITS> 29,065,000
<UNDERWRITING-AMORTIZATION> 2,491,000
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 7,218,000
<INCOME-TAX> 2,063,000
<INCOME-CONTINUING> 5,155,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,155,000
<EPS-BASIC> .70
<EPS-DILUTED> .69
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
EXHIBIT 10(iii)(A)(6)
STOCK APPRECIATION RIGHTS AGREEMENT
STOCK APPRECIATION RIGHTS AGREEMENT dated as of ___________
between Independence Holding Company, a Delaware corporation (the
"Company"), and ___________, an employee of the Company (the
"Employee").
W I T N E S S E T H:
WHEREAS, the Company has adopted and maintains the Company's
1988 Stock Incentive Plan, as amended (the "Plan") to secure for
the Company and its stockholders the benefit of the incentives
inherent in common stock ownership and the receipt of incentive
awards by selected key employees of the Company and its
subsidiaries who contribute to and will be responsible for its
continued growth and to provide a mechanism for attracting,
motivating and retaining such key employees by providing an
opportunity for capital appreciation and giving suitable
recognition for services which contribute materially to the
success of the Company; and
WHEREAS, Section 2 of the Plan provides that the Committee
(as that term is defined in the Plan) shall have the power and
authority to grant Awards under the Plan, including, consistent
with the terms of the Plan, the power and authority to select
officers and other key employees of the Company to whom awards
may be granted from time to time, to determine the times of
grant, the number of shares of Stock to be covered by any Award
and to determine the other terms and conditions, not inconsistent
with the terms of the Plan, of any Award; and
WHEREAS, the Committee has determined that the Employee is a
key employee of the Company and is in a position to make an
important contribution to the Company's long-term performance and
has determined to grant to the Employee an award of a Stock
Appreciation Right pursuant to Section 7 of the Plan.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants hereinafter set forth, and for other good and
valuable consideration, the parties hereto agree as follows:
1. Award of Stock Appreciation Right. Subject to the terms and
conditions hereafter set forth, the Company hereby grants to the
Employee an Award of a stand-alone Stock Appreciation Right with
respect to ______ shares of Stock (the "SAR").
2. Base Price. The base price-per-share of Stock subject to
the SAR (the "Base Price") shall be $____, which is the Fair
Market Value of a share of Stock as of the Grant Date.
3. Date of Grant. For all purposes of the Plan, the date of
grant of the SAR granted hereby shall be __________ (the "Grant
Date").
4. Incorporation of Plan. All terms, conditions and
restrictions of the Plan are incorporated herein and made part
hereof as if stated herein. If there is any conflict between the
terms and conditions of the Plan and this Agreement, the terms
and conditions of the Plan,
1
<PAGE>
as interpreted by the Committee,
shall govern. Except as otherwise provided herein, all
capitalized terms used herein shall have the meaning given to
such terms in the Plan.
5. Exercise Terms.
(a) Subject to the provisions of the Plan and this
Agreement, the SAR granted hereby shall expire and terminate on
________ (the "Expiration Date").
(b) The SAR shall become exercisable in ____ equal
installments, the first of which shall become exercisable on
___________, and the second of which shall become exercisable on
___________. Once an installment becomes exercisable, subject to
the terms hereof and of the Plan, it shall remain exercisable
until the Expiration Date. The SAR may be exercised from time to
time (each an "Exercise Date") as to all or part to the extent
then exercisable.
6. Payment Upon Exercise of Stock Appreciation Right.
(a) Except as set forth in Section 7 hereof, upon the
exercise of the SAR, the Employee shall become entitled to
receive an amount equal to the product of (i) the excess of (A)
the Fair Market Value of a share of Stock on the Exercise Date
over (B) the Base Price, multiplied by (ii) the number of shares
with respect to which the SAR is exercised. Such amount shall be
paid in cash within 120 days after the Exercise Date.
(b) As used herein, the "Fair Market Value" of a share of
Stock on any given date means the average of the closing bid and
asked prices of the Stock on a national exchange, or in the
absence of closing bid and asked prices on such day, such average
on the first preceding day. So long as the Stock is listed on the
National Association of Securities Dealers' Automated Quotation
System ("NASDAQ"), Fair Market Value shall be determined in the
same manner, except the closing bid and asked prices used shall
be as reported by NASDAQ.
7. Termination of Employment. In the event of the
termination of the Employee's employment as an employee of the
Company other than for Cause, the SAR, to the extent then
outstanding and exercisable, shall be deemed to have been
exercised as of the date of Disability, death or termination of
employment, and the SAR, to the extent not then exercisable,
immediately shall terminate and be of no further force or effect.
In the event of termination of the Employee's employment as an
employee of the Company for Cause, the SAR shall terminate and
shall cease to be exercisable immediately and shall be of no
further force or effect. The SAR shall not be affected by any
change of employment so long as the Employee continues to be an
employee of the Company.
8. Changes in Stock. In the event of any stock dividend, stock
split, reverse stock split, recapitalization, exchange of shares
or similar change in capitalization affecting the Stock, the
Committee shall make appropriate adjustments in the (b) number
and kind of shares subject to the SAR and/or (ii) Base Price. In
the event of any merger, consolidation, dissolution or
liquidation of the Company, the Committee, in its sole
discretion, may make such substitution or adjustment in the
number of shares subject to the SAR and in the Base Price as it
may determine, or accelerate, amend or terminate the SAR upon
such terms and conditions as it shall provide. Notwithstanding
the foregoing, in the event that all or any portion of the SAR is
terminated and not replaced with a similar award, the Committee
shall deliver to the Employee such payment or other consideration
as the Committee deems equitable under the circumstances.
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9. Withholding Taxes. All payments under this Agreement shall
be net of an amount sufficient to satisfy any federal, state and
local withholding tax requirements.
10. Nature of Payments.
(a) Any and all payments hereunder shall be paid in
consideration of services performed for the Company or its
Subsidiaries or for their benefit by the Employee.
(b) All such payments shall constitute a special incentive
payment to the Employee and shall not, unless otherwise
determined by the Committee or unless otherwise expressly
provided in any applicable plan document or agreement, be taken
into account in computing the amount of salary or regular
compensation of the Employee for the purposes of determining any
pension, retirement, death or other benefits under (i) any
pension, retirement, life insurance or other benefit plan of the
Company or any Subsidiary thereof or (ii) any agreement between
the Company or any Subsidiary thereof, on the one hand, and the
Employee, on the other hand.
11. Other Payments or Awards. Nothing contained in this
Agreement shall be deemed in any way to limit or restrict the
Company, any Subsidiary thereof or the Committee from making any
award or payment to the Employee under any other plan, agreement,
arrangement or understanding, whether now existing or thereafter
in effect, nor shall anything contained in this Agreement create
a right of the Employee to receive any Award under the Plan or
any other type of award or compensation.
12. Right to Terminate Employment. Nothing in this Agreement
shall confer upon the Employee the right to continue in the
employment of the Company or any of its Subsidiaries or affect
any right which the Company or any of its Subsidiaries may have
to terminate the employment of the Employee.
13. Non-Transferability. No rights granted to the Employee
under this Agreement shall be assignable or transferable by the
Employee, except by will or by the laws of descent and
distribution. During the life of the Employee, all rights
granted to the Employee under this Agreement shall be exercisable
only by the Employee or by the Employee's guardian or legal
representative.
14. Administration.
(a) The Committee shall have and exercise all of the power
and authority, among other things, (i) to construe, interpret and
implement this Agreement, and (ii) to make all determinations
necessary or advisable in administering this Agreement.
(b) No member of the Committee shall be liable for any
action or determination made in good faith with respect to this
Agreement or any Award hereunder.
15. No Rights as a Stockholder. The grant of the SAR hereunder
shall not confer on the Employee any of the rights of a
stockholder of the Company.
16. Notices. Any notice to be given to the Company hereunder
shall be in writing and shall be addressed to the Secretary of
the Company, at 96 Cummings Point Road, Stamford, Connecticut
06902, or at such other address as the Company may hereafter
designate to the Employee by notice as provided herein. Any
notice to be given to the Employee hereunder shall
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be addressed
to the Employee at the address set forth beneath his signature
hereto, or at such other address as the Employee may hereafter
designate to the Company by notice as provided herein. Notices
hereunder shall be deemed to have been duly given when mailed by
registered or certified mail to the party entitled to receive the
same.
17. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and the
successors and assigns of the Company and, to the extent set
forth in Section 7 hereof, to the heirs and personal
representatives of the Employee.
18. Exercise. The SAR shall be exercisable in whole or in part.
The partial exercise of the SAR shall not cause the expiration,
termination or cancellation of the remaining portion thereof.
The SAR shall be exercised by delivering a notice of such
exercise to the Company, no less than one business day in advance
of the effective date of the proposed exercise. Such notice
shall be accompanied by this Agreement, shall specify the number
of shares of Stock with respect to which the SAR is being
exercised and the effective date of the proposed exercise. The
Employee may withdraw such notice at any time prior to the close
of business on the business day immediately preceding the
effective date of the proposed exercise, in which case this
Agreement shall be returned to the Employee.
19. Employee Acknowledgment. The Employee hereby acknowledges
receipt of a copy of the Plan. The Employee hereby acknowledges
that all decisions, determinations and interpretations of the
Committee in respect of the Plan, this Agreement and the SAR
shall be final and conclusive.
20. Integration. This Agreement (together with the Plan, which
is incorporated herein by reference) contains the entire
understanding of the parties with respect to its subject matter.
There are no restrictions, agreements, promises, representations,
warranties, covenants or undertakings with respect to the subject
matter hereof other than those expressly set forth herein. This
Agreement supersedes all prior agreements and understandings
between the parties with respect to its subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first above written.
INDEPENDENCE HOLDING COMPANY
By: ______________________________
__________________________________
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