INDEPENDENCE HOLDING COMPANY CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations of
Overview
While management considers a wide range of factors in its strategic planning and
decision-making, underwriting profit is consistently emphasized as the primary
goal in all decisions as to whether or not to increase our retention in a core
line, expand into new products, acquire an entity or a block of business, or
otherwise change our business model. Management's assessment of trends in
healthcare and morbidity, with respect to specialty health, disability,
COVID-19
In
The COVID-19 outbreak continues to be a fluid situation. The business continuity
and emergency response plans we implemented in
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The following is a summary of key performance information and events:
Results of operations are summarized as follows for the periods indicated (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenues $ 113,220 $ 95,165 $ 324,522 $ 284,469
Expenses 102,511 85,746 307,711 256,010
Income before income taxes 10,709 9,419 16,811 28,459
Income taxes 1,977 3,248 3,219 6,482
Net income 8,732 6,171 13,592 21,977
(Income) from noncontrolling interests (44) (29) (205) (261)
Net income attributable to IHC$ 8,688 $ 6,142 $ 13,387 $ 21,716
·Income from operations of
oNet income for the three and nine months ended
oNet income for the nine months ended
·Consolidated investment yields (on an annualized basis) of 2.2% and 2.4% for
the three and nine months ended
·Book value of
·Results for the first nine months of 2020 were not materially impacted by COVID-19 although sales of Short Term Medical ("STM") might have grown more if not for displaced workers taking advantage of Special Enrollment Periods for Affordable Care Act ("ACA") coverage, and the subsidies provided through Advanced Premium Tax Credits, as well as employers continuing to offer employer sponsored coverage to furloughed workers. Evolving regulatory mandates for testing and treatment coverage, the length and severity of the outbreak, claims activity, and impacts on payment of premiums have not
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had a significant impact on the 2020 results to date, however, we may incur additional expenses for the balance of the year relating to possible COVID-19 related claims activity and possible non-payment of premiums as the full effects of the outbreak continue to unfold.
The following is a summary of key performance information by segment:
·The Specialty Health segment reported income before taxes of
oPremiums earned increased
oUnderwriting experience, as indicated by itsU.S. GAAP Combined Ratios, for theSpecialty Health segment are as follows for the periods indicated (in thousands): Three Months Ended Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Premiums Earned$ 49,209 $ 44,462 $ 139,664 $ 133,467 Insurance Benefits, Claims & Reserves 20,295 19,585 62,552 56,334 Expenses 24,910 20,972 71,996 62,424 Loss Ratio (A) 41.2% 44.0% 44.8% 42.2% Expense Ratio (B) 50.6% 47.2% 51.5% 46.8% Combined Ratio (C) 91.8% 91.2% 96.3% 89.0%
(A)Loss ratio represents insurance benefits, claims and reserves divided by premiums earned.
(B)Expense ratio represents commissions, administrative fees, premium taxes and other underwriting expenses divided by premiums earned.
(C)The combined ratio is equal to the sum of the loss ratio and the expense ratio.
oThe higher loss ratio in the first nine months of 2020 primarily reflects the
broadening of the mix of business, with a higher concentration of more stable
product lines with lower profit margins. The higher expense ratio in the first
nine months of 2020 is primarily due to
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the MCE, the combined ratio would have been 93.7% for the nine months ended
·Income before taxes from the Group disability, life, DBL and PFL segment was
·The Individual life, annuities and other segment in run-off reported losses
before income taxes of
·The Corporate segment reported losses before taxes of
·Premiums by principal product for the periods indicated are as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
Gross Direct and Assumed
Earned Premiums: 2020 2019 2020 2019
Specialty Health $ 51,201 $ 46,203 $ 144,974 $ 137,476 Group disability, life, DBL and PFL 57,175 49,073 174,004 142,217 Individual life, annuities and other 4,894 4,862 14,524 15,984
$ 113,270 $ 100,138 $ 333,502 $ 295,677 Three Months Ended Nine Months Ended September 30, September 30, Net Direct and Assumed Earned Premiums: 2020 2019 2020 2019 Specialty Health$ 49,209 $ 44,462 $ 139,664 $ 133,467
Group disability, life, DBL and PFL 50,908 41,977 155,173 120,683 Individual life, annuities and other 7
14 28 39
$ 100,124 $ 86,453 $ 294,865 $ 254,189
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform to
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reported in the financial statements and accompanying notes. Actual results
could differ from those estimates. A summary of the Company's significant
accounting policies and practices is provided in Note 1 of the Notes to the
Consolidated Financial Statements included in Item 8 of the Annual Report on
Form 10-K for the fiscal year ended
Results of Operations for the Three Months Ended
Information by business segment for the periods indicated is as follows:
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2020
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 49,209 609 10,251 20,295 34,877 $ 4,897
Group disability,
life, DBL and 50,908 1,713 107 29,380 14,562 8,786
PFL
Individual life,
annuities and 7 281 214 152 534 (184)
other
Corporate - 190 (339) - 2,711 (2,860)
Sub total $ 100,124 $ 2,793 $ 10,233 $ 49,827 $ 52,684 10,639
Net investment gains 70 Income before income taxes 10,709 Income taxes 1,977 Net Income$ 8,732 Benefits, Selling, Net Fee and Claims General September 30, 2019 Premiums Investment Other and and
(In thousands) Earned Income Income Reserves Administrative Total
life, DBL and PFL 41,977 1,928 120 21,396 12,644 9,985 Individual life, annuities and 14 369 76 417 682 (640) other Corporate - 535 979 - 3,497 (1,983) Sub total$ 86,453 $ 3,964 $ 3,818 $ 41,398 $ 44,348 8,489
Net investment gains 930 Income before income taxes 9,419 Income taxes 3,248 Net Income$ 6,171 Premiums Earned
In the third quarter of 2020, premiums earned increased
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in other group life business, partially offset by a
Net Investment Income
Total net investment income decreased
Net Investment Gains
The Company had net investment gains of
Fee Income and Other Income
Fee income increased
Other income increased
Insurance Benefits, Claims and Reserves
In the third quarter of 2020, insurance benefits, claims and reserves increased
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased
increases in commissions, administrative fees and other general expenses in the STM and pet lines of business from increased premium volume, in addition
increased lead generation expenses, compensation and system development related
expenses in our marketing and administrative companies, partially offset by
decreases in commission and administrative expenses related to decreased volume
in the fixed indemnity limited benefit line; and (ii) an increase of
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and other general expenses on PFL, group term life and LTD lines of business all due to increased premium volume.
Income Taxes
The effective tax rate for the three months ended
Results of Operations for the Nine Months Ended
Information by business segment for the periods indicated is as follows:
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2020
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 139,664 2,098 18,492 62,552 96,529 $ 1,173
Group disability,
life, DBL and 155,173 5,402 395 95,474 43,927 21,569
PFL
Individual life,
annuities and 28 692 590 448 1,328 (466)
other
Corporate - 980 75 - 7,453 (6,398)
Sub total $ 294,865 $ 9,172 $ 19,552 $ 158,474 $ 149,237 15,878
Net investment gains 933
Income before income taxes 16,811
Income taxes 3,219
Net Income $ 13,592
Benefits, Selling,
Net Fee and Claims General
September 30, Premiums Investment Other and and
2019
(In thousands) Earned Income Income Reserves Administrative Total
Specialty Health $ 133,467 3,116 12,836 56,334 79,477 $ 13,608
Group disability,
life, DBL and 120,683 5,958 427 71,664 36,217 19,187
PFL
Individual life,
annuities and 39 1,008 238 929 1,478 (1,122)
other
Corporate - 2,012 2,775 - 9,911 (5,124)
Sub total $ 254,189 $ 12,094 $ 16,276 $ 128,927 $ 127,083 26,549
Net investment gains 2,556
Net impairment losses recognized in earnings (646)
Income before income taxes 28,459
Income taxes 6,482
Net Income $ 21,977 --------------------------------------------------------------------------------
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Premiums Earned
In the first nine months of 2020, premiums earned increased
Net Investment Income
Total net investment income decreased
Net Investment Gains and Net Impairment Losses Recognized in Earnings
The Company had net investment gains of
In 2020, the Company did not recognize any other-than-temporary impairment
losses on fixed maturities available-for-sale. In the first nine months of 2019,
the Company recognized
Fee Income and Other Income
Fee income increased
Other income increased
Insurance Benefits, Claims and Reserves
In the first nine months of 2020, insurance benefits, claims and reserves
increased
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partially offset by decreases of
Selling, General and Administrative Expenses
Total selling, general and administrative expenses increased
Income Taxes
The effective tax rate for the nine months ended
LIQUIDITYInsurance Group
Corporate
Corporate derives its funds principally from: (i) dividends from the
Cash Flows
The Company had
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For the nine months ended
On
The Company had
The Company believes it has sufficient cash to meet its currently anticipated business requirements over the next twelve months including working capital requirements and capital investments.
There were no material negative impacts on the Company's cash flows or liquidity with regards to COVID-19 during the first nine months of 2020. Depending on the length and severity of the outbreak, it is possible that cash flows may be negatively impacted due to increased claim activity as a result of mandated testing and treatment coverage, as well as delayed policy payments or an increase in cancelled policies due to non- payment in the remainder of 2020.
BALANCE SHEET
The Company had receivables due from reinsurers of
The Company's liability for policy benefits and claims by segment are as follows
(in thousands):
Policy Benefits and Claims
September 30, December 31,
2020 2019
Specialty Health $ 38,879 $ 42,228
Group Disability 120,109 112,623
Individual A&H and Other 15,126 9,951
$ 174,114 $ 164,802 For the
The reserving analysis includes a review of claim processing statistical measures and large claim early notifications; the potential impacts of any changes in these factors are not material. The Company has business that is serviced by third-party administrators. From time to time, there
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are changes in the timing of claims processing due to any number of factors including, but not limited to, system conversions and staffing changes during the year. These changes are monitored by the Company and the effects of these changes are taken into consideration during the claim reserving process. Other than these considerations, there have been no significant changes to methodologies and assumptions from the prior year.
While these calculations are based on standard methodologies, they are estimates based on historical patterns. To the extent that actual claim payment patterns differ from historical patterns, such estimated reserves may be redundant or inadequate. The effects of such deviations are evaluated by considering claim backlog statistics and reviewing the reasonableness of projected claim ratios.
Other factors which may affect the accuracy of policy benefits and claim estimates include the proportion of large claims which may take longer to adjudicate, changes in billing patterns by providers and changes in claim management practices such as hospital bill audits.
Since our analysis considered a variety of outcomes related to these factors, the Company does not believe that any reasonably likely change in these factors will have a Material Effect.
The Company's disability business is comprised of group disability and DBL. The two "primary" assumptions on which disability policy benefits and claims are based are: (i) morbidity levels; and (ii) recovery rates. If morbidity levels increase, for example due to an epidemic or a recessionary environment, the Company would increase reserves because there would be more new claims than expected. In regard to the assumed recovery rate, if disabled lives recover more quickly than anticipated then the existing claims reserves would be reduced; if less quickly, the existing claims reserves would be increased. Advancements in medical treatments could affect future recovery, termination, and mortality rates.
The
Asset Quality and Investment Impairments
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. The Company has gross unrealized gains of
The Company reviews its investments regularly and monitors its investments
continually for impairments. The Company did not record any other-than-temporary
impairment losses in the nine months ended
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The following table summarizes the carrying value of securities with fair values
less than 80% of their amortized cost at
Greater than Greater than
3 months, 6 months,
Less than less than less than Greater than
3 months 6 months 12 months 12 months Total
Fixed maturities $ - $ -$ 1,503 $ -$ 1,503
The unrealized losses on fixed maturities available-for-sale were evaluated in
accordance with the Company's impairment policy and were determined to be
temporary in nature at
CAPITAL RESOURCES
Due to its strong capital ratios, broad licensing and excellent asset quality
and credit-worthiness, the
OUTLOOK
For the balance of this year and for 2021, the Company anticipates that it will:
·Continue to invest in the growth of our pet division, which will have
underwritten
·Investment in our administrator, PetPartners, which has an exclusive
relationship with the
·Pet insurance has now become a highly requested employee benefit, which has led
us to make it available through work-site marketing. This trend has been
amplified by a partnership between
·Independence American will continue to act as underwriter for three well-known companies:
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MetLife,
·We will also accelerate the generation of non-risk revenue through the pet division's newest brand asset, TailTrax, an all-inclusive subscription-based app with Tele-Vet and other high-touch engagement features. This app will be available without charge to insureds of PetPartners. In addition, we will begin in 2021 to generate advertising and lead revenues from Petplace.com, which is one of the leading sites for veterinarian-curated pet information with one million visitors per month.
·Invest both our capital and efforts in continuing to develop a fully integrated direct-to-consumer ("D2C") division, which can generate leads, has reporting systems and sales automation platforms, and licensed agents servicing products underwritten both by IHC's carriers and other nationally recognized insurers.
·Expand in-house capabilities through the "MarTech" acquisition we made in April, which will accelerate proprietary lead generation and direct to consumer growth. We have rapidly expanded our portfolio of consumer touchpoints across all of our distribution channels, including web domains (www.healthinsurance.org, www.medicareresources.org, www.healthedeals.com, www.petplace.com, call centers, field agents, and social media). This should improve our cost of sale by: (i) harnessing an in-house marketing team to drive media efficiency and effectiveness, (ii) deploying data science and artificial intelligence ("AI") to improve lead quality and intent; and (iii) leveraging a proprietary lead marketplace to salvage unused leads and recoup costs.
·Build on our entry, in the fourth quarter of 2019, into the very large market
for senior products by selling Medicare products underwritten by leading
national insurance companies, including
In addition, Independence American has launched its Medicare Supplement product in twenty-nine states, although we do not anticipate substantial sales during the current 2021 AEP as agents are primarily focused on selling Medicare Advantage at this time.
·Increasingly emphasize sales by IHC Agencies of policies underwritten by non-affiliated carriers, including small group stop-loss, ACA plans and Medicare Advantage and Medicare Supplement; for which, they will receive commissions and fees for selling these products and will not bear any of the insurance risk. When they sell products for these other carriers, the IHC Agencies will record revenue based on estimated constrained lifetime values ("LTV") representing the expected commissions to be received over the lifetime of the policies sold. As these products generally renew for multiple years, and the IHC Agencies do not have any future performance obligations with regards to the renewal process, they will record revenue at the time of sale based on our expected policy duration. Therefore, due to the change in focus to sales of non-IHC products in 2020, particularly during AEP, we expect a significant increase in commission revenues in the fourth quarter of 2020. When we do sell our products instead of
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ACA, we are focusing on our "cover me to open enrollment" Short-Term Medical
product (which provides up to 36 months of coverage in many states), which
provides coverage from the day of sale to
This allows insureds the option of moving to an ACA plan during an open enrollment period without having to pay for days of coverage they don't need.
·Grow the number of agents using our wholly owned Web Based Entity ("WBE"), INSX Cloud to do individual ACA enrollments. When agents utilize the INSX Cloud for enrollments we earn fee income and commission. Additionally, we have specialty health plans on the site that can be enrolled at the same time as the ACA plans which earn underwriting profit for IHC carriers and in certain instances a commission override for the agency.
•Continue to increase our DBL/PFL premiums. Effective
·Achieve increases in both long-term and short-term disability premiums generated from new distribution relationships.
·Accomplish increases in life and disability premium by developing additional strategic functional and distribution partnerships, broaden worksite portfolio, and enhance Business to Business and Business to Consumer website functionality.
·Continue to evaluate strategic transactions. We plan to deploy some of our cash to make additional investments and acquisitions that will bolster existing or new lines of business.
·Continue to focus on administrative efficiencies.
·Continue to monitor the COVID-19 outbreak as it evolves. The duration of COVID-19 and its potential effects on our business cannot be certain, we currently cannot predict if there will be a material impact to our business, results of operations or financial condition in the remainder of 2020. During unprecedented times of uncertainty and high unemployment surrounding the COVID-19 pandemic, we have fully transitioned our existing sales teams to work from home. Our customer facing agents have transitioned to a full-time work at home model, and although we have implemented enhanced technology solutions, sales may be impacted as COVID-19 continues to develop.
Subject to making additional repurchases, acquisitions and investments, the Company will remain highly liquid as a result of the continuing shorter duration of the investment portfolio. The short duration of our portfolio enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income in the future. A low duration portfolio such as ours also mitigates the adverse impact of potential inflation. IHC will continue to monitor the financial markets and invest accordingly.
Our results depend on the adequacy of our product pricing, our underwriting, the accuracy of our reserving methodology, returns on our invested assets, and our ability to manage expenses. We will also need to be diligent with increased rate review scrutiny to effect timely rate changes and will need to stay focused on the management of medical cost drivers in the event medical trend levels cause margin pressures. Factors affecting these items, as well as unemployment and global financial markets, may have a material adverse effect on our results of operations and financial condition.
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