| AMERICAN INDEPENDENCE CORP Item 1A Risk Factors The risks and uncertainties described below are not the only ones that the Company faces but only those identified by the Company, in accordance with the requirements of Item 503(c) of Regulation S-K, as being the most significant factors that make investment in the Company speculative or risky and that have special application to the Company |
| Additional risks and uncertainties not presently known to the Company or that the Company currently deems less significant than identified herein may also make investment in the Company speculative or risky |
| If any of the following risks actually occur, the Companyapstas business, financial condition or results of operations could be materially adversely affected |
| In such case, the trading price of the Companyapstas common stock could decline |
| The Companyapstas Loss Reserves are Based on an Estimate of Its Future Liability, and if Actual Claims Prove to be Greater Than The Companyapstas Reserves, Its Results of Operations and Financial Condition May Be Adversely Affected The Company maintains loss reserves to cover its estimated liability for unpaid losses and loss adjustment expenses, including legal and other fees, and costs not associated with specific claims but related to the claims payment functions for reported and unreported claims incurred as of the end of each accounting period |
| Because setting reserves is inherently uncertain, the Company cannot be sure that current reserves will prove adequate |
| If the Companyapstas reserves are insufficient to cover its actual losses and loss adjustment expenses, the Company would have to augment its reserves and incur a charge to its earnings, and these charges could be material |
| Reserves do not represent an exact calculation of liability |
| Rather, reserves represent an estimate of what the Company expects the ultimate settlement and administration of claims will cost |
| These estimates, which generally involve actuarial projections, are based on the Company apstas assessment of facts and circumstances then known |
| Many factors could affect these reserves, including economic and social conditions, frequency and severity of claims, medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, and changes in doctrines of legal liability and damage awards in litigation |
| Additionally, there may be a significant reporting lag between the occurrence of the insured event and the time it is reported to the Company |
| The inherent uncertainties of estimating reserves are greater for certain types of liabilities, particularly those in which the various considerations affecting the type of claim are subject to change and in which long periods of time may elapse before a definitive determination of liability is made |
| Reserve estimates are continually refined in a regular and ongoing process as experience develops and further claims are reported an d settled |
| Adjustments to reserves are reflected in the results of the periods in which such estimates are changed |
| The Companyapstas Results May Fluctuate as a Result of Factors Generally Affecting the Insurance and Reinsurance Industry The results of companies in the insurance and reinsurance industry historically have been subject to significant fluctuations and uncertainties |
| Factors that affect the industry in general could also cause the Companyapstas results to fluctuate |
| The industries and the Companyapstas financial condition and results of operations may be affected significantly by: · Fluctuations in interest rates, inflationary pressures and other changes in the investment environment, which affect returns on invested capital; · Rising levels of actual costs that are not known by companies at the time they price their products; · Losses related to epidemics, terrorist activities, random acts of violence or declared or undeclared war; 12 · Changes in reserves resulting from different types of claims that may arise and the development of judicial interpretations relating to the scope of insurers &apos liability; · The overall level of economic activity and the competitive environment in the industry; · Greater than expected use of healthcare services by members; · New mandated benefits or other regulatory changes that increase the Company’s costs; and · Failure of MGUs to adhere to underwriting guidelines as required by the Company in its MGU agreements |
| Decrease in Rates for Reinsurance and Insurance Could Reduce Net Income Independence American, the Companyapstas insurance subsidiary, primarily reinsures medical stop loss insurance |
| Rates for medical stop loss insurance and reinsurance are influenced primarily by factors that are outside of Independence Americanapstas control and historically have been highly cyclical |
| Any significant decrease in the rates for medical stop loss insurance or reinsurance could reduce the Companyapstas net income |
| If the Rating Agencies Downgrade Independence American, the Companyapstas Results of Operations and Competitive Position in the Industry May Suffer Ratings are an important factor in establishing the competitive position of insurance companies |
| Independence American is rated B++ (Very Good) by AM Best Company, Inc, whose ratings reflect its opinions of an insurance companyapstas financial strength, operating performance, strategic position, and ability to meet its obligations to policyholders, and are not evaluations directed to investors |
| The rating of Independence American is subject to periodic review by AM Best Company, Inc, and the Company is not assured of the continued retention of this rating |
| If AM Best Company, Inc |
| reduces Independence Americanapstas ratings from its current levels, the Companyapstas business would be adversely affected |
| Stock Transfer Restrictions Although the stock transfer restrictions contained in the Certificate of Incorporation are intended to reduce the likelihood of an ownership change, it will not prevent all transfers that might result in an "e ownership change "e |
| Furthermore, certain changes in relationships and other events not addressed by the stock transfer restrictions could cause AMIC to undergo an "e ownership change "e |
| Section 382 of the Code is an extremely complex provision with respect to which there are many uncertainties |
| In addition, AMIC has not requested a ruling from the IRS regarding the effectiveness of the stock transfer restrictions and, therefore, AMIC cannot be certain that the IRS will agree that the stock transfer restrictions are effective for purposes of Section 382 of the Code |
| Further, AMIC cannot assure that the stock transfer restrictions or portions thereof will be enforceable i n Delaware courts or that the IRS would agree that all of AMICapstas tax net operating loss carryforwards are allowable |
| In addition, AMICapstas board of directors may determine, in its sole discretion, to permit a restricted transfer that results in an "e ownership change "e if it determines that such transfer is in the best interests of AMIC Therefore, the stock transfer restrictions were to reduce, but not necessary eliminate, the risk that Section 382 of the Code will cause limitations on the use of tax attributes of AMIC Adherence by the MGU’s to Underwriting Guidelines The Company’s MGU agreements require that the MGU follow underwriting guidelines published by the company and amended from time to time |
| Failure to follow these guidelines may result in termination or modification of the MGU agreement |
| The Company performs periodic audits to confirm adherence to the guidelines, but it is possible that the Company would not detect a breach in the guidelines for several months after the infraction which could result in a material impact on the loss ratio for that MGU and could have a material impact on the Company’s financial condition, results of operations and liquidity |
| 13 Inability to Assess Underwriting Risk Accurately Could Reduce Net Income The Companyapstas success is dependent on its ability to assess accurately the risks associated with the businesses on which the risk is retained |
| If the Company fails to assess accurately the risks it retains, it may fail to establish the appropriate premium rates and its reserves may be inadequate to cover its losses, requiring augmentation of the Company reserves |
| If the Company is Unsuccessful in Competing Against Larger or More Well-Established Competitors, Its Results of Operations and Financial Condition Will Be Adversely Affected The Companyapstas industry is highly competitive and has experienced severe price competition from time to time over the last several years |
| The Company faces competition from domestic and international insurance and reinsurance companies, underwriting agencies, and from diversified financial services companies that are significantly larger than the Company |
| Some of these competitors have greater financial, marketing and other resources, have been operating longer than the Company and have established long-term and continuing business relationships through the industry, which can be a significant competitive advantage |
| In addition to competition in the operation of its business, the Company faces competition from a variety of sources in attracting and retaining qualified employees |
| The Company cannot assure that it will maintain its current competitive position in the markets in which it opera tes, or that it will be able to expand its operations into new markets and compete effectively in the future |
| If the Company fails to do so, its business could be materially adversely affected |
| If the Company Fails to Comply with Extensive State and Federal Regulations, It Will Be Subject to Penalties, Which May Include Fines and Suspension and Which May Adversely Affect Its Results of Operations and Financial Condition |
| The Company is subject to extensive governmental regulation and supervision |
| Most insurance regulations are designed to protect the interests of policyholders rather than stockholders and other investors |
| This regulation, generally administered by a department of insurance in each state in which it does business, relates to, among other things: · Approval of policy forms and premium rates; · Standards of solvency, including risk-based capital measurements, which are a measure developed by the National Association of Insurance Commissioners and used by state insurance regulators to identify insurance companies that potentially are inadequately capitalized; · Licensing of insurers and their agents; · Restrictions on the nature, quality and concentration of investments; · Restrictions on the ability of Independence American to pay dividends to the Company; · Restrictions on transactions between insurance companies and their affiliates; · Restrictions on the size of risks insurable under a single policy; · Requiring deposits for the benefit of policyholders; · Requiring certain methods of accounting; 14 · Prescribing the form and content of records of financial condition required to be filed; and · Requiring reserves for losses and other purposes |
| State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters |
| The Companyapstas business depends on compliance with applicable laws and regulations and its ability to maintain valid licenses and approvals for its operations |
| Regulatory authorities have broad discretion to grant, renew, or revoke licenses and approvals |
| Regulatory authorities may deny or revoke licenses for various reasons, including the violation of regulations |
| In some instances, the Company follows practices based on its interpretations of regulations, or those that it believes to be generally followed by the industry, which may be different from the requirements or interpretations of regulatory authorities |
| If the Company does not have the requisite licenses and approvals and does not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend it from carrying on some or all of its activities or otherwise penalize it |
| Also, changes in the level of regulation of the insurance industry (whether federal, state or foreign), or changes in laws or regulations themselves or interpretations by regulatory authorities, co uld have a material adverse effect on the Companyapstas business |
| Certain Proposed Federal and State Legislation May, if Adopted, Adversely Affect the Companyapstas Insurance Products In the continuing debate over health care reform, certain federal and state legislation has been proposed which could have the effect of making plan sponsors, administrators, or certain other parties liable for punitive damages in state court |
| State legislatures also periodically consider bills to fund deficits in state high-risk health care pools that through assessments that will place an additional financial burden on employee benefit plans |
| While the Company cannot predict whether any of these or other proposals will be adopted or what, if any, impact enactment they would have on its insurance products, the number of employers offering health benefits or choosing self-insured plans could be reduced, plans could increase the portion paid by employees (thereby reducing participation), pricing and coverage options could be affected, and the Company could be faced with greater liability exposure |
| Decreases in the Fair Market Value of Fixed Maturities May Greatly Reduce the Value of the Companyapstas Investment Portfolio, and as a Result, the Companyapstas Financial Condition May Suffer At December 31, 2005, fixed maturities represented dlra40dtta4 million or 83dtta3prca of the Companyapstas total investments of dlra48dtta5 million |
| The fair market value of fixed maturities and the related investment income fluctuates depending on general economic and market conditions |
| The fair market value of these investments generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by the Company will generally increase or decrease in line with changes in market interest rates |
| In addition, actual net investment income and/or cash flows from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from those anticipated at the time of investment as a result of interest rate fluctuations |
| An investment has prepayment risk when there is a risk that the timing of cash flows that result from the repayment of principal might occur earlier than anticipated because of declining interest rates or later than anticipated because of rising interest rates |
| The impact of market value fluctuations affects the Companyapstas Consolidated Financial Statements |
| Because all of the Companyapstas fixed maturities are classified as available for sale, changes in the fair market value of the Companyapstas securities are reflected in the Companyapstas stockholders &apos equity (accumulated other comprehensive income or loss) |
| No similar adjustment is made for liabilities to reflect a change in interest rates |
| Therefore, interest rate 15 fluctuations and economic conditions could adversely affect the Companyapstas stockholders &apos equity, total comprehensive income and/or cash flows |
| IHC Will Exercise Significant Influence Over the Companyapstas Business and Affairs, Which May Result in Potential Conflicts of Interest Between IHC and the Company; Reliance on IHCapstas Expertise The Companyapstas operations are being directed by IHC management and employees, which may result in potential conflicts of interest between IHC and the Company |
| For example, a conflict may arise if IHC were to engage in activities or pursue corporation opportunities that overlap with the Companyapstas business |
| Because IHCapstas management will also constitute the Companyapstas management, these individuals will have fiduciary duties to both companies, which could result in conflicts of interest, including the Company foregoing opportunities or taking actions that disproportionately benefit IHC IHC will also have at least two representatives on the Companyapstas Board of Directors who will have similar conflicts of interest |
| In addition, the Company is relying upon the management and expertise of officers of IHC who also serve as officers of the Company |
| The Company has US federal tax net operating loss carryforwards of approximately dlra278 million, which may be used against any profits from the Companyapstas business |
| However, events outside of the control of the Company or IHC, such as certain acquisitions and dispositions of the Companyapstas common stock, may limit the use of all or a portion of the Companyapstas tax net operating loss carryforwards |
| If such events were to occur, the Companyapstas expectation of using its tax net operating loss carryforwards against potential profits would not be realized and the Company could potentially have a higher tax liability in the future than it would otherwise have had |
| Regulatory Restrictions Limit the Companyapstas Ability to Obtain Dividends from Independence American One of the Companyapstas principal assets is its ownership, through a holding company, of all of the shares of capital stock of Independence American |
| In the event that the Company needs to receive dividends from Independence American to meet its obligations for paying principal and interest on outstanding debt obligations, dividends to stockholders and corporate expenses, payment of such dividends by Independence American would be subject to regulatory restrictions and would depend on the surplus and future earnings of Independence American is subject to regulatory restrictions and would depend on the surplus and future earnings of Independence American, as well as the regulatory restrictions |
| As a result, should the Companyapstas other sources of funds prove to be inadequate, the Company may not be able to receive dividends from Independence American at times and in amounts necessary to meet its obligations |