Strength. Vision. Stability.

 

May 21, 2020

 

VIA EDGAR

 

United States Securities and Exchange Commission

Division of Corporation Finance

Office of Finance

100 F Street, NE,

Washington D.C. 20549

 

Re: INDEPENDENCE HOLDING CO

Form 10-K for the Fiscal Year Ended December 31, 2019

Filed March 16, 2020

File No. 001-32244

 

Dear Sir or Madam:

 

This letter is being furnished in response to comments contained in the letter dated May 11, 2020 from the staff (the “Staff”) of the United States Securities and Exchange Commission (the “Commission”) to Ms. Teresa A. Herbert, Chief Financial Officer of Independence Holding Company (“IHC”), with respect to IHC’s Annual Statement on Form 10-K filed with the Commission on March 16, 2020.

 

The text of the Staff's comments is set forth below, followed by IHC’s responses.

 

Capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms as set forth in the Form 10-K filed with the Commission on March 16, 2020.

 

Form 10-K for the fiscal year ended December 31, 2019

Notes to Consolidated Financial Statements

Note 11. Policy and Benefits Claims, page 87

 

We note the activity in the reserves for losses and loss expenses on pages 87-88 present a favorable development of $20,294,000 for prior years losses and loss expenses including $5,879,000 in specialty health reserves and $11,681,000 in the group disability reserves; however, the tables that you present on pages 88-92 appear to depict favorable development of approximately $7.8 million for group disability reserves and $5.7M for specialty health reserves. Further, the claims paid related to prior years for both Specialty Health and Group Disability of $37.5M are significantly lower than the $54.7M shown in the rollforward table on page 87. We also note that the objective of the short-duration disclosures as outlined in paragraph BC 2 of ASU 2015-09 is to provide financial statement users with information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from insurance contracts and the development of loss reserve estimates. Please address the following:

 

 1 

 

 

1.Explain to us, and revise your disclosures in future filings to provide a more granular discussion of the differences relating the favorable assessments and claims paid noted above. It might be useful to provide a reconciliation to support your discussion.

 

2.Explain to us the lines of business not included in the tables and quantify the prior year development for those lines in 2019.

 

3.Explain why you do not include the lines of business identified in the preceding bullet in your tables, and provide your consideration for disclosing such information.

 

Response:

 

In this response, we have included revised Note disclosures for 2019 as recommended by your office with more granular discussions and reconciliations. These revised Note disclosures will be included in future filings. The revisions include:

 

(i)the presentation of the policy benefits and claims rollforward disaggregated into four major categories (Specialty Health business, DBL and PFL business, group disability business, and all other lines) and in total. The Specialty Health, DBL and PFL business and the group disability business columns each correspond to the claims development tables and disclosures that follow the policy benefits and claims rollforward; and

 

(ii)quantitative disclosures of amounts incurred related to prior years by line of business within certain categories, as defined above, that is in a tabular format and reconciles to the policy benefits and claims rollforward.

 

The new presentation of the policy benefits and claims rollforward quantifies prior year developments for all other lines not presented in claims development tables. All other lines consist primarily of life, other individual health products and our medical stop-loss business in run-off.

 

In addition, we have added language in the revised Note disclosures preceding the DBL and PFL claims development table to explain and quantify the amounts incurred and paid related to prior years that are not included in the DBL and PFL development table for reasons discussed in more detail below. These disclosures, as revised, will be included in future filings.

 

 2 

 

 

Specialty Health

 

Most lines in the Specialty Health segment are fully developed within 5 years and as such we present the claims development table with 5 years of data. However, included in the Specialty Health segment is our occupational accident line that tends to develop over a slightly longer period. The differences between the amounts shown in the rollforward for the Specialty Health segment ($5,879,000 of favorable development incurred for prior years and $23,647,000 of amounts paid for prior years), and the amounts depicted in the 5-year Specialty Health claims development table ($5,693,000 of favorable development incurred for prior years and $23,482,000 of amounts paid for prior years) is $186,000 in amounts incurred and $165,000 of amounts paid that is primarily related to occupational accident claims for accident years prior to 2015.

 

DBL and PFL, and Group Disability

 

Our DBL and PFL business is very short tail in nature and the claim liabilities are typically developed in less than one year. Any DBL and PFL amounts incurred or paid for prior calendar years is recognized in the first few months of the following calendar reporting year. Those claims are fully developed early in the calendar year. The development table presented for DBL and PFL business depicts the claims development for amounts that are included in the benefits and claims reserves on the balance sheet date, and that ending liability for IBNR plus expected claims development is all related to the current accident year.

 

We revised and added additional language preceding the 2019 DBL and PFL claims development table to explain and quantify the above information as follows:

 

Less than one year of claims development data is presented below for our DBL and PFL claim liabilities as claims develop in under one year. At December 31, 2019, the liability for IBNR plus expected development related to our DBL and PFL business was $22,774,000 and (i) relates entirely to the current accident year; and (ii) includes an accrual for a potential risk adjustment payment of $10,000,000 associated with the PFL rider due to expected better than industry claims experience and $2,400,000 of DBL premium refund reserves to meet the mandated minimum loss ratio requirements. Prior year favorable incurred development of $6,489,000, and amounts paid related to prior years of $13,747,000, were recognized in the first few months of the 2019 calendar year on DBL and PFL business. Claim liabilities corresponding to these amounts were fully developed early in 2019, and no liability for IBNR or expected claim development was remaining at December 31, 2019.

 

After inserting the above language, the DBL and PFL claims development disclosures, together with the group disability claims development tables, reconcile to the favorable amounts incurred related to prior years as shown in the policy benefits and claims liability rollforward as follows:

 

DBL and PFL, now shown in policy benefits and claims rollforward  $6,489 
      
Group disability, undiscounted   7,835 
Group disability, impact of discounting   (2,643)
     Group disability, discounted, now shown in policy benefits and claims rollforward   5,192 
      
Total DBL, PFL and group disability, as previously disclosed  $11,681 

 

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Claims Paid Related to Prior Years

 

After revising the presentation of the policy benefits and claims rollforward and inserting the above DBL and PFL language, the claims development disclosures and tables reconcile to the amounts paid related to prior years as shown in the policy benefits and claims liability rollforward as follows:

 

Specialty Health, per claims development table  $23,482 
Specialty Health, payments for accident years prior to 2015   165 
     Specialty Health, now shown in policy benefits and claims rollforward   23,647 
      
DBL and PFL, now disclosed in language preceding claims development table and     
     shown in policy benefits and claims rollforward   13,747 
      
Group disability, per claims development table   14,001 
Group disability, payments for accident years prior to 2010   1,229 
     Group disability, now shown in policy benefits and claims rollforward   15,230 
      
All other lines, now shown in policy benefits and claims rollforward   2,071 
      
     Total claims, prior years, disclosed in policy benefits and claims rollforward  $54,695 

 

 4 

 

 

Note 11. Policy Benefits and Claims (REVISED for 2019)

 

Policy benefits and claims is the liability for unpaid loss and loss adjustment expenses. It is comprised of unpaid claims and estimated IBNR reserves. Summarized below are the changes in the total liability for policy benefits and claims for the periods indicated (in thousands).

 

   2019 
                     
   Specialty   DBL and   Group   All Other     
   Health   PFL   Disability   Lines   Total 
                     
Balance at beginning of year  $38,363   $21,080   $82,222   $18,450   $160,115 
Less: reinsurance recoverable   1,335    719    24,712    11,356    38,122 
Net balance at beginning of year   37,028    20,361    57,510    7,094    121,993 
                          
Amount incurred, related to:                         
   Current year   82,678    65,452    31,463    16,531    196,124 
   Prior years   (5,879)   (6,489)   (5,192)   (2,734)   (20,294)
                          
   Total incurred   76,799    58,963    26,271    13,797    175,830 
                          
Amount paid, related to:                         
   Current year   49,669    42,803    11,794    11,053    115,319 
   Prior years   23,647    13,747    15,230    2,071    54,695 
                          
   Total paid   73,316    56,550    27,024    13,124    170,014 
                          
Net balance at end of year   40,511    22,774    56,757    7,767    127,809 
Plus:  reinsurance recoverable   1,717    664    23,322    11,290    36,993 
Balance at end of year  $42,228   $23,438   $80,079   $19,057   $164,802 

 

Since unpaid loss and loss adjustment expenses are estimates, actual losses incurred may be more or less than the Company’s previously developed estimates and is referred to as either unfavorable or favorable development, respectively.

 

Net favorable development in the Specialty Health segment was comprised of the following lines of business for the period indicated (in thousands):

 

   2019 
Short-term medical  $1,850 
Occupational accident   2,054 
Limited Medical   474 
Critical illness   325 
All other lines   1,176 
      
     Total Specialty Health  $5,879 

 

Specialty Health net favorable development occurred primarily in the short-term medical and occupational accident lines of business. Favorable development in short-term medical business was due to paid claim activity that was below anticipated levels as medical investigations were completed and the reliability of claim payment patterns at a newer claim administrator emerged. Additionally, favorable development occurred in the occupational accident line, in run-off, mainly due to some claims settling for amounts less than anticipated and due to a lower level of employer liability claims than anticipated in relation to historical levels, and favorable development in other various lines of Specialty Health business primarily due to better than expected claim development.

 

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The net favorable development of $6,489,000 in the DBL and PFL business is mainly due to favorable adjustments to prior year DBL premium refund reserves in addition to better than expected DBL claims experience.

 

Favorable development of $5,192,000 in the group disability business is primarily due to the LTD business. The LTD line experienced better than expected claim development in terms of duration and net payments.

 

All other lines, primarily life and other individual health products and including our medical stop-loss business in run-off, experienced favorable development of $2,734,000. The favorable development is primarily related to the group term life business due to continued improvements in experience and updated assumptions for the Paid-Up Life business.

 

Specialty Health Segment

 

The following tables provide undiscounted information about net incurred and paid claims development by accident year for significant short-duration contract liabilities for policy benefits and claims in our Specialty Health segment. All amounts are shown net of reinsurance. In addition, the tables present the total IBNR plus expected development on reported claims by accident year and the cumulative number of reported claims (in thousands, except number of reported claims). Refer to Note 1 for information on the methods we use to estimate IBNR plus expected development, as well as changes to those methodologies and assumptions. Five years of claims development data is presented for lines that are included in our Specialty Health segment since a majority of the claims are fully developed in that time. Certain information about incurred and paid claims is presented as supplementary information and unaudited where indicated.

 

Specialty Health Segment –Claims Development
       December 31, 2019 
   Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance   Incurred But   Cumulative 
   For the years ended December 31,   Not Reported   Number of 
Accident  2015   2016   2017   2018       Plus Expected   Reported 
Year  (unaudited)   (unaudited)   (unaudited)   (unaudited)   2019   Development   Claims 
                           (Actual) 
2015  $104,497    100,988    101,241    100,642   $101,260   $293    467,232 
2016        85,426    86,446    86,244    85,399    1,161    538,382 
2017             87,070    77,214    77,194    1,275    628,748 
2018                  74,652    69,206    4,259    661,819 
2019                       82,926    33,257    537,636 
                   Total   $415,985           

 

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Specialty Health Segment –Claims Development
     
   Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance 
   For the years ended December 31, 
Accident  2015   2016   2017   2018     
Year  (unaudited)   (unaudited)   (unaudited)   (unaudited)   2019 
                     
2015  $70,090    94,757    97,603    99,364   $100,967 
2016        45,454    78,611    82,983    84,238 
2017             49,289    73,667    75,918 
2018                  46,574    64,947 
2019                       49,670 
                          
Total   $375,740 
                          
Outstanding policy benefits and claims payable before 2015, net of reinsurance    266 
                          
Total policy benefits and claims, net of reinsurance   $40,511 

 

The claim frequency information consists of the count of claims submitted. Each claim was counted as one claim whether or not multiple claim lines were submitted with that claim, and each claim was counted whether or not it resulted in a liability. For those portions of business that did not have claim records readily available, a reasonable count assumption was made based on a comparison to the known records of a similar business type. Cumulative claim count information is not a precise tool for calculating claim severity. Factors, such as changes in provider billing practices, the mix of services, benefit designs or processing systems could impact this type of analysis. The Company does not necessarily use the cumulative number of reported claims disclosed above in its claims analysis but has provided this information to comply with accounting standards.

 

The following is supplementary information about the average historical policy claims duration for the Specialty Health segment as of December 31, 2019:

 

Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited)
           
  Year 1 Year 2 Year 3 Year 4 Year 5
Specialty Health Segment 62.7% 30.3% 3.6% 1.6% 1.6%

 

 7 

 

 

The liability for policy benefits and claims associated with the Company’s health insurance lines are embedded within the Specialty Health segment. The table below summarizes the components of the change in the liability for policy benefits and claims that are specific to the health insurance claims that are included in our Specialty Health segment for the periods indicated (in thousands).

 

   Specialty Health Segment 
    Health Insurance Claims 
    2019    2018 
           
Balance at beginning of year  $26,068   $32,904 
Less: reinsurance recoverable   851    762 
Net balance at beginning of year   25,217    32,142 
           
Amount incurred, related to:          
   Current year   51,479    47,143 
   Prior years   (3,517)   (9,000)
           
   Total incurred   47,962    38,143 
           
Amount paid, related to:          
   Current year   25,738    24,422 
   Prior years   17,295    20,646 
           
   Total paid   43,033    45,068 
           
Net balance at end of year   30,146    25,217 
Plus:  reinsurance recoverable   1,113    851 
Balance at end of year  $31,259   $26,068 

 

The liability for the IBNR plus expected development on reported claims associated with the Company’s health insurance claims was $30,146,000 at December 31, 2019.

 

 8 

 

 

Group Disability, Life, DBL and PFL Segment

 

The following tables provide undiscounted information about net incurred and paid claims development by accident year for significant short-duration contract liabilities for policy benefits and claims related to our DBL, PFL and group disability policy claims (in thousands). All amounts are shown net of reinsurance. Refer to Note 1 for information on the methods we use to estimate IBNR plus expected development, as well as changes to those methodologies.

 

Less than one year of claims development data is presented below for our DBL and PFL claim liabilities as claims develop in under one year. At December 31, 2019, the liability for IBNR plus expected development related to our DBL and PFL business was $22,774,000 and (i) relates entirely to the current accident year; and (ii) includes an accrual for a potential risk adjustment payment of $10,000,000 associated with the PFL rider due to expected better than industry claims experience and $2,400,000 of DBL premium refund reserves to meet the mandated minimum loss ratio requirements. Prior year favorable incurred development of $6,489,000, and amounts paid related to prior years of $13,747,000, were recognized in the first few months of the 2019 calendar year on DBL and PFL business. Claim liabilities corresponding to these amounts were fully developed early in 2019, and no liability for IBNR or expected claim development was remaining at December 31, 2019. The cumulative number of reported claims was approximately 18,000 at December 31, 2019 and consists of the number of claims either paid or accrued.

 

Group disability, life, DBL and PFL Segment – DBL/PFL Claims Development  
Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance  
For the year ended December 31,  
Accident          
Year     2019  
           
2019   Total   $ 65,452  

  

Group disability, life, DBL and PFL Segment – DBL/PFL Claims Development  
Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance  
For the year ended December 31,  
Accident          
Year       2019  
           
2019   Total $ 42,678  
           
    Total policy benefits and claims, net of reinsurance $ 22,774  

 

Ten years of undiscounted claims development data is presented for our group disability contract liabilities (in thousands). In addition, total IBNR plus expected development on reported claims by accident year is presented with the cumulative number of reported claims (in thousands, except number of reported claims). Certain information about incurred and paid claims is presented as supplementary information and unaudited where indicated.

 

 9 

 

 

Group disability. Life, DBL and PFL Segment – Group Disability Claims Development
       December 31, 2019 
   Incurred Claims and Claim Adjustment Expenses, Net of Reinsurance   Incurred    
   For the years ended December 31,  But Not Reported  

Cumulative

Number

 
Accident  2010   2011   2012   2013   2014   2015   2016   2017   2018       Plus Expected  

of

Reported

 
Year  (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   2019   Development   Claims 
                                               (Actual) 
2010  $11,990    10,561    6,263    4,245    3,965    3,030    6,599    7,239    6,938   $6,857   $-    2,311 
2011        18,558    16,948    16,166    15,271    15,730    16,672    16,712    16,516    16,546    -    2,337 
2012             15,356    13,708    12,187    12,177    12,585    12,472    12,161    11,883    -    2,263 
2013                  32,952    30,832    29,893    32,070    31,664    31,378    31,545    505    2,629 
2014                       16,314    13,322    14,792    14,414    14,311    14,488    165    2,783 
2015                            25,335    19,247    16,630    14,705    14,552    219    3,253 
2016                                 28,450    28,568    27,359    25,988    331    3,498 
2017                                      29,897    26,021    22,851    425    3,777 
2018                                           29,766    26,610    1,603    3,997 
2019                                                34,518    10,972    3,439 
Total   $205,838           

  

Group disability, life, DBL and PFL Segment – Group Disability Claims Development 
      
    Cumulative Paid Claims and Claim Adjustment Expenses, Net of Reinsurance 
    For the years ended December 31, 
Accident   2010   2011   2012   2013   2014   2015   2016   2017   2018     
Year   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   (unaudited)   2019 
                                          
 2010   $3,197    8,200    9,799    10,345    10,762    11,284    11,797    12,200    12,565   $12,902 
 2011         3,252    8,191    9,622    10,186    10,737    11,363    11,993    12,522    12,979 
 2012              3,069    7,003    8,033    8,591    8,997    9,509    9,924    10,177 
 2013                   5,454    12,541    16,424    19,428    21,536    23,460    25,029 
 2014                        3,663    8,466    9,919    10,623    11,142    11,661 
 2015                             6,825    14,034    16,634    17,203    17,623 
 2016                                  8,333    16,379    19,269    20,261 
 2017                                       8,459    16,139    17,901 
 2018                                            8,417    16,109 
 2019                                                 11,794 
                                                     
 Total                                                  $156,436 
                                                     
 Outstanding policy benefits and claims payable before 2010, net of reinsurance    17,737 
                                                     
 Total policy benefits and claims, net of reinsurance   $67,139 

 

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The incurred claims and claim adjustment expenses, net, for the 2013 accident year include the acquisition of $15,384,000 of disability policy benefits and claims liabilities from a Receivership.

 

Claim frequency information consists of the count of unique claims where a benefit has been paid, whether that benefit was paid for one month or multiple months. Any claims where a benefit has not been paid are not in the count. Cumulative claim count information is not a precise tool for calculating claim severity. Changes in reinsurance and other factors, such as those described in Note 1, could impact this type of analysis with regards to our group disability business. The Company does not necessarily use the cumulative number of reported claims disclosed above in its claims analysis but has provided this information to comply with accounting standards.

 

Unpaid claim liabilities related to our group disability policies is presented at present value. The following is additional information on unpaid claims liabilities presented at present value (in thousands):

 

   Carrying Value of   Aggregate Amount 
   Unpaid Claim Liabilities   of Discount 
   December 31,   December 31 
   2019   2018   2019   2018 
                 
Group disability  $56,756   $57,510   $10,382   $10,764 

 

Discount rates for each of the years ended December 31, 2019 and 2018 ranged from 3% to 6%. Insurance benefits, claims and reserves on the Consolidated Statements of Income for the years ended December 31, 2019 and 2018 include the accretion of interest amounting to $1,524,000 and $1,617,000, respectively.

 

The following is supplementary information about the average historical claims duration for our group disability business as of December 31, 2019:

 

Group Disability
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance (unaudited)
                            
Year 1  Year 2  Year 3  Year 4  Year 5  Year 6  Year 7  Year 8  Year 9  Year 10
17.6%  20.3%  6.7%  3.1%  2.1%  2.1%  1.6%  0.7%  0.3%  0.1%

  

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The following table reconciles the above disclosures of undiscounted net incurred and paid claims development for significant short-duration contract liabilities to the liability for policy benefits and claims on the consolidated balance sheet (in thousands).

 

   December 31, 2019 
     
Net outstanding balances:    
    Specialty Health Segment  $40,511 
    DBL/PFL   22,774 
    Group disability   67,139 
    Other short-duration insurance lines   7,712 
      
    Policy benefits and claims, net of reinsurance   138,136 
      
Reinsurance recoverable on unpaid claims:     
    Specialty Health Segment   1,717 
    DBL/PFL   664 
    Group disability   23,322 
    Other short-duration insurance lines   11,290 
      
    Reinsurance recoverable on unpaid claims   36,993 
      
Insurance lines other than short-duration   55 
Aggregate discount   (10,382)
      
Total policy benefit and claims  $164,802 

 

Should members of the Staff have any questions or require any additional information, they should call the undersigned at (203) 358-5030.

 

Very truly yours,

 

/s/ Teresa A. Herbert

Senior Vice President and Chief Financial Officer

 

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