INDEPENDENCE HOLDING CO (Form: 10-Q, Received: 11/09/2016 17:19:11)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________________________________

FORM 10-Q

[X]

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2016.

[ ]

Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from: ________ to _________

Commission File Number: 001-32244

INDEPENDENCE HOLDING COMPANY

(Exact name of registrant as specified in its charter)


Delaware		58-1407235
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

96 CUMMINGS POINT ROAD, STAMFORD, CONNECTICUT 06902

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (203) 358-8000

NOT APPLICABLE

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 [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer [ ]	Accelerated Filer [ X ]
Non-Accelerated Filer [ ]	Smaller Reporting Company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]


Class	Outstanding at November 7, 2016
Common stock, $ 1.00 par value	17,067,875 Shares

INDEPENDENCE HOLDING COMPANY

INDEX


PART I – FINANCIAL INFORMATION				PAGE
					NO.

		Item 1. Financial Statements

			Condensed Consolidated Balance Sheets	4

			Condensed Consolidated Statements of Income	5

			Condensed Consolidated Statements of Comprehensive Income (Loss)	6

			Condensed Consolidated Statement of Changes in Equity	7

			Condensed Consolidated Statements of Cash Flows	8

			Notes to Condensed Consolidated Financial Statements	9

		Item 2. Management's Discussion and Analysis of Financial Condition
			and Results of Operations	33

		Item 3. Quantitative and Qualitative Disclosures about Market Risk		46

		Item 4. Controls and Procedures		47

PART II - OTHER INFORMATION

		Item 1. Legal Proceedings		48

		Item 1A. Risk Factors		48

		Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48

		Item 3. Defaults Upon Senior Securities		48

		Item 4. Mine Safety Disclosures		48

		Item 5. Other Information		48

		Item 6. Exhibits		50

	Signatures			52

Copies of the Company’s SEC filings can be found on its website at www.ihcgroup.com.

Forward-Looking Statements

This report on Form 10 − Q contains certain “ forward-looking statements ” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created by those laws. We have based our forward-looking statements on our current expectations and projections about future events. Our forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as the growth of our business and operations, our business strategy, competitive strengths, goals, plans, future capital expenditures and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probably” or similar expressions, we are making forward-looking statements.

Numerous risks and uncertainties may impact the matters addressed by our forward-looking statements, any of which could negatively and materially affect our future financial results and performance. We describe some of these risks and uncertainties in greater detail in Item 1A, Risk Factors , of IHC’s annual report on Form 10-K as filed with Securities and Exchange Commission.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements that are included in this report, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved. Our forward-looking statements speak only as of the date made, and we will not update these forward-looking statements unless the securities laws require us to do so. In light of these risks, uncertainties and assumptions, any forward-looking event discussed in this report may not occur.

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

						September 30, 2016		December 31, 2015
						(Unaudited)
ASSETS:
	Investments:
		Short-term investments			$	8,151	$	50
		Securities purchased under agreements to resell				11,282		28,285
		Trading securities				1,135		1,259
		Fixed maturities, available-for-sale				472,348		428,601
		Equity securities, available-for-sale				6,685		8,426
		Other investments				21,178		21,538
				Total investments		520,779		488,159

	Cash and cash equivalents					79,208		17,500
	Due and unpaid premiums					57,454		69,075
	Due from reinsurers					478,845		483,073
	Premium and claim funds					25,881		22,015
	Goodwill					41,573		47,276
	Other assets					47,065		57,934
	Assets attributable to discontinued operations (Note 3)					-		12,931

				TOTAL ASSETS	$	1,250,805	$	1,197,963

LIABILITIES AND STOCKHOLDERS’ EQUITY:
LIABILITIES:
	Policy benefits and claims				$	242,819	$	245,443
	Future policy benefits					233,261		270,624
	Funds on deposit					150,651		173,350
	Unearned premiums					11,567		10,236
	Other policyholders' funds					9,797		11,822
	Due to reinsurers					66,577		46,355
	Accounts payable, accruals and other liabilities					55,930		64,109
	Liabilities attributable to discontinued operations (Note 3)					408		(15)
	Debt					-		5,189
	Junior subordinated debt securities					38,146		38,146

				TOTAL LIABILITIES		809,156		865,259

STOCKHOLDERS’ EQUITY:
IHC STOCKHOLDERS' EQUITY:
	Preferred stock $1.00 par value, 100,000 shares authorized;
			none issued or outstanding			-		-
	Common stock $1.00 par value, 23,000,000 shares authorized;
			18,585,858 and 18,569,183 shares issued; 17,067,875 and
			17,265,758 shares outstanding			18,586		18,569
	Paid-in capital					126,001		127,733
	Accumulated other comprehensive income (loss)					3,448		(3,440)
	Treasury stock, at cost; 1,517,983 and 1,303,425 shares					(17,483)		(13,961)
	Retained earnings					308,415		194,450

TOTAL IHC STOCKHOLDERS’ EQUITY						438,967		323,351
NONCONTROLLING INTERESTS IN SUBSIDIARIES						2,682		9,353

				TOTAL EQUITY		441,649		332,704

				TOTAL LIABILITIES AND EQUITY	$	1,250,805	$	1,197,963

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

					Three Months Ended				Nine Months Ended
					September 30,				September 30,
					2016		2015		2016		2015
REVENUES:
	Premiums earned			$	67,335	$	119,038	$	195,524	$	361,595
	Net investment income				4,004		3,920		12,700		13,830
	Fee income				4,050		2,201		12,541		9,195
	Other income				2,261		5,790		8,898		8,349
	Gain on sale of subsidiary to joint venture				-		10,161		-		10,161
	Net realized investment gains (losses)				2,367		(1,109)		3,945		2,991
	Other-than-temporary impairment losses:
	Total other-than-temporary impairment losses				(1,475)		(228)		(1,475)		(228)
	Portion of losses recognized in other comprehensive income (loss)				-		-		-		-
	Net impairment losses recognized in earnings				(1,475)		(228)		(1,475)		(228)

					78,542		139,773		232,133		405,893
EXPENSES:
	Insurance benefits, claims and reserves				38,277		74,218		109,497		233,218
	Selling, general and administrative expenses				32,823		43,202		97,947		133,640
	Interest expense on debt				440		444		1,366		1,354

					71,540		117,864		208,810		368,212

	Income from continuing operations before income taxes				7,002		21,909		23,323		37,681
	Income taxes				2,636		7,750		8,566		13,599

	Income from continuing operations				4,366		14,159		14,757		24,082

	Discontinued operations: (Note 3)
	Income from discontinued operations, before income taxes				-		1,305		117,636		2,254
	Income taxes on discontinued operations				-		576		7,724		961
	Income from discontinued operations				-		729		109,912		1,293

	Net income				4,366		14,888		124,669		25,375
	Less: Income from noncontrolling interests in subsidiaries				(43)		(128)		(9,900)		(364)

			NET INCOME ATTRIBUTABLE TO IHC	$	4,323	$	14,760	$	114,769	$	25,011

Basic income per common share: (Note 2)
	Income from continuing operations			$	.25	$	.81	$	.84	$	1.37
	Income from discontinued operations				.00		.04		5.84		.07
		Basic income per common share		$	.25	$	.85	$	6.68	$	1.44

WEIGHTED AVERAGE SHARES OUTSTANDING					17,120		17,292		17,189		17,331

Diluted income per common share: (Note 2)
	Income from continuing operations			$	.25	$	.81	$	.83	$	1.36
	Income from discontinued operations				.00		.04		5.77		.07
		Diluted income per common share		$	.25	$	.85	$	6.60	$	1.43

WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING					17,340		17,457		17,402		17,496

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)

			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2016		2015		2016		2015

Net income		$	4,366	$	14,888	$	124,669	$	25,375
Other comprehensive income (loss):
	Available-for-sale securities:
	Unrealized gains (losses) on available-for-sale securities, pre-tax		(1,173)		2,982		10,734		(2,130)
	Tax expense (benefit) on unrealized gains (losses) on available-for-sale securities		(418)		1,060		3,830		(818)
	Unrealized gains (losses) on available-for-sale securities, net of taxes		(755)		1,922		6,904		(1,312)

	Other comprehensive income (loss), net of tax		(755)		1,922		6,904		(1,312)

	COMPREHENSIVE INCOME, NET OF TAX		3,611		16,810		131,573		24,063

Comprehensive (income) loss, net of tax, attributable to noncontrolling interests:
Income from noncontrolling interests in subsidiaries			(43)		(128)		(9,900)		(364)
Other comprehensive (income) loss, net of tax, attributable to noncontrolling interests:
	Unrealized (gains) losses on available-for-sale securities, net of tax		47		(51)		(118)		(61)
	Other comprehensive (income) loss, net of tax, attributable to
	noncontrolling interests		47		(51)		(118)		(61)

	COMPREHENSIVE (INCOME) LOSS, NET OF TAX,
	ATTRIBUTABLE TO NONCONTROLLING INTERESTS		4		(179)		(10,018)		(425)

	COMPREHENSIVE INCOME, NET OF TAX,
	ATTRIBUTABLE TO IHC	$	3,615	$	16,631	$	121,555	$	23,638

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) (In thousands)


									ACCUMULATED								NON-
									OTHER		TREASURY				TOTAL IHC		CONTROLLING
					COMMON		PAID-IN		COMPREHENSIVE		STOCK,		RETAINED		STOCKHOLDERS'		INTERESTS IN		TOTAL
					STOCK		CAPITAL		INCOME (LOSS)		AT COST		EARNINGS		EQUITY		SUBSIDIARIES		EQUITY

BALANCE AT
	DECEMBER 31, 2015			$	18,569	$	127,733	$	(3,440)	$	(13,961)	$	194,450	$	323,351	$	9,353	$	332,704

Net income													114,769		114,769		9,900		124,669
Other comprehensive
	income, net of tax								6,786						6,786		118		6,904
Repurchases of common stock											(3,522)				(3,522)		-		(3,522)
Purchases of noncontrolling
		interests					(2,332)		102						(2,230)		(15,911)		(18,141)
Common stock dividend
		($.045 per share)											(773)		(773)		-		(773)
Share-based compensation
	expenses and related
			tax benefits		17		322								339		-		339
Distributions to noncontrolling
		interests													-		(847)		(847)
Other capital transactions							278						(31)		247		69		316

BALANCE AT
	SEPTEMBER 30, 2016			$	18,586	$	126,001	$	3,448	$	(17,483)	$	308,415	$	438,967	$	2,682	$	441,649

See the accompanying Notes to Condensed Consolidated Financial Statements.


INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

						Nine Months Ended September 30,
						2016		2015
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES:
	Net income				$	124,669	$	25,375
	Adjustments to reconcile net income to net change in cash from
		operating activities:
			Gain on disposal of discontinued operations, net of tax			(109,447)		-
			Gain on sale of subsidiary to joint venture			-		(10,161)
			Gain on disposition of assets			-		(5,053)
			Amortization of deferred acquisition costs			245		3,446
			Net realized investment gains			(3,945)		(2,991)
			Other-than-temporary impairment losses			1,475		228
			Equity (income) loss from equity method investments			7		(579)
			Depreciation and amortization			1,482		1,740
			Deferred tax expense			2,565		(7,070)
			Other			6,683		4,988
Changes in assets and liabilities:
			Net (purchases) sales of trading securities			3,180		160
			Change in insurance liabilities			(41,713)		(17,627)
			Change in deferred acquisition costs			(217)		26,827
			Change in amounts due from reinsurers			4,227		(203,570)
			Change in premium and claim funds			(4,835)		(3,556)
			Change in current income tax liability			(6,550)		17,376
			Change in due and unpaid premiums			11,621		(6,360)
			Other operating activities			(6,200)		656

				Net change in cash from operating activities		(16,753)		(176,171)

CASH FLOWS PROVIDED BY (USED BY) INVESTING ACTIVITIES:
	Net (purchases) sales of short-term investments					(8,104)		-
	Net (purchases) sales of securities under resale agreements					17,003		5,708
	Sales of equity securities					2,429		9,187
	Purchases of equity securities					-		(4,423)
	Sales of fixed maturities					335,562		601,187
	Maturities and other repayments of fixed maturities					35,505		36,505
	Purchases of fixed maturities					(406,348)		(491,069)
	Acquisition of subsidiary, net of cash acquired					-		511
	Proceeds on sales/deconsolidation of subsidiaries, net of cash divested					137,115		3,524
	Proceeds from sale of assets					-		8,000
	Change in policy loans					-		10,629
	Proceeds on sales of other investments					2,064		-
	Purchases of other investments					(3,371)		-
	Other investing activities					(3,433)		(1,035)

				Net change in cash from investing activities		108,422		178,724

CASH FLOWS PROVIDED BY (USED BY) FINANCING ACTIVITIES:
		Repurchases of common stock				(3,522)		(1,722)
		Cash paid in acquisitions of noncontrolling interests				(18,141)		(1,734)
		Withdrawals of investment-type insurance contracts				(1,447)		(1,756)
		Repayments of debt				(4,789)		(2,137)
		Dividends paid				(1,588)		(1,392)
		Other financing activities				(474)		220

				Net change in cash from financing activities		(29,961)		(8,521)

Net change in cash and cash equivalents						61,708		(5,968)
Cash and cash equivalents, beginning of year						17,500		23,408

Cash and cash equivalents, end of period					$	79,208	$	17,440

See the accompanying Notes to Condensed Consolidated Financial Statements.

INDEPENDENCE HOLDING COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1.

Organization, Consolidation, Basis of Presentation and Accounting Policies

(A)

Business and Organization

Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. and IHC Carrier Solutions, Inc. IHC also owns a significant equity interest in: (i) Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health and pet insurance; and (ii) a managing general underwriter (“MGU”) that writes medical stop-loss. On March 31, 2016, the Company sold IHC Risk Solutions, LLC (“Risk Solutions”), its managing general underwriter of excess or stop-loss insurance. In addition, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is 100% co-insured as of January 1, 2016 and IHC’s block of Medical Stop-Loss business is in run-off. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”.

Geneve Corporation, a diversified financial holding company, and its affiliated entities, held approximately 54% of IHC's outstanding common stock at September 30, 2016.

(B)

Consolidation

AMIC Holdings, Inc.

AMIC Holdings, Inc., formerly known as American Independence Corp., (“AMIC”) is an insurance holding company engaged in the insurance and reinsurance business. At December 31, 2015, the Company owned approximately 92% of its outstanding common stock. On August 31, 2016, IHC took AMIC private by way of a statutory “short-form" merger. The Company paid $18,141,000 for the remaining shares of AMIC common stock owned by noncontrolling interests and as a result, the Company now owns all of the outstanding common stock of AMIC. In connection with the transaction, $2,230,000 was charged to paid-in capital representing: (i) the difference between the fair value of the consideration paid for the shares and the carrying amount of noncontrolling interests; plus (ii) specific, direct costs of the transaction.

Effects of Ownership Changes in Subsidiaries

The following table summarizes the effects of changes in the Company’s ownership interests in its subsidiaries on IHC’s equity for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Changes in IHC’s paid-in capital:
Purchase of AMIC shares	$	(2,230)	$	-	$	(2,230)	$	(199)
Purchase remaining IPA Family, LLC interests		-		-		-		311

Net transfers from noncontrolling interests	$	(2,230)	$	-	$	(2,230)	$	112

(C)

Basis of Presentation

The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited Condensed Consolidated Financial Statements include the accounts of IHC and its consolidated subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements; and (ii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. IHC’s annual report on Form 10-K as filed with the Securities and Exchange Commission should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements.

On March 31, 2016, the Company sold Risk Solutions, its managing general underwriter of excess or stop-loss insurance for self-insured employer groups that desire to manage the risk of large medical claims (“Medical Stop-Loss”). In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is 100% co-insured as of January 1, 2016. IHC’s block of medical stop-loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The disposal transaction qualified for reporting as discontinued operations in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. The assets, liabilities, and related income and expenses associated with the disposal group are presented as discontinued operations in the accompanying condensed consolidated financial statements and Notes thereto. The results of discontinued operations reflect the operations of the disposed MGUs. See Note 3 for more information. The run-off of IHC’s remaining block of medical stop-loss business is in continuing operations.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) that are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods have been included. The condensed consolidated results of operations for the three months and nine months ended September 30, 2016 are not necessarily indicative of the results to be anticipated for the entire year.

(D)

Reclassifications

Certain amounts in prior year’s consolidated financial statements and Notes thereto have been reclassified to conform to the 2016 presentation, primarily for the effects of discontinued operations.

(E)

Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In September 2015, the FASB issued guidance to simplify the accounting for adjustments made to provisional amounts recognized in a business combination and eliminate the requirement to retrospectively account for those adjustments. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In February 2015, the FASB issued guidance that modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities for the purpose of consolidation. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2014, the FASB issued explicit guidance for entities that grant their employees share-based payments in which the terms of the award include a performance target that affects vesting and could be achieved after the requisite service period. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Recently Issued Accounting Standards Not Yet Adopted

In October 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this Update should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and are effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In August 2016, the FASB issued guidance that changes how certain cash receipts and cash payments are presented and classified in the cash flows statement. The amendments in this Update are effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued guidance requiring financial assets measured at amortized cost basis to be presented at the net amount expected to be collected. An allowance for credit losses will be deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected with changes in the allowance recorded in earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses rather than a write-down, which would be limited to the amount by which fair value is below the amortized cost. Certain existing requirements used to evaluate credit losses have been removed. For public entities that are SEC filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The amendments in this Update should be applied through a cumulative effect adjustment to retained earnings upon adoption as of the beginning of the first reporting period in which the guidance is effective. Management has not yet determined the impact the adoption of this guidance will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued guidance that simplify several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the statement of cash flows. The amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In March 2016, the FASB issued guidance that eliminates the requirement for retroactive adjustments on the date that a previously held investment qualifies for the equity method of accounting as a result of an increase in ownership interest or degree of influence. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should be applied prospectively upon their effective date. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued guidance that requires lessees to recognize the assets and liabilities that arise from leases, including operating leases, on the statement of financial position. The amendments in this Update are effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years, using a modified retrospective approach. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued guidance that eliminates the requirement to classify equity securities with readily determinable fair values as trading or available-for-sale. The guidance requires equity securities (including other ownership interests, such as partnerships, unincorporated joint ventures, and limited liability companies) to be measured at fair value with changes in the fair value recognized through net income, simplifies the impairment assessment of equity securities without readily determinable fair values and requires changes in disclosure requirements. For public entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in certain circumstances. The amendments in this Update should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption of the Update. The adoption of this guidance is not expected to have a material effect on the Company’s Consolidated Balance Sheet or IHC’s stockholders’ equity.

In May 2015, the FASB issued guidance requiring additional disclosures for short-duration contracts regarding the liability for unpaid claims and claim adjustment expenses. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact the disclosures will have on the Company’s consolidated financial statements.

In May 2014, the FASB issued revenue recognition guidance for entities that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards such as insurance contracts or lease contracts. The amendment provides specific steps that an entity should apply in order to achieve its main objective which is recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In 2016, additional guidance was issued to clarify certain aspects of the implementation guidance and to clarify the identification of performance obligations. In August 2015, the effective date of this guidance has been deferred. For public entities, this guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and requires one of two specified retrospective methods of application. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Management has not yet determined the impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

Note 2.

Income Per Common Share

Diluted earnings per share was computed using the treasury stock method and includes incremental common shares, primarily from the dilutive effect of share-based payment awards, amounting to 220,000 and 213,000 shares for the three months and nine months ended September 30, 2016, respectively; and 165,000 shares for both the three months and nine months ended September 30, 2015, respectively.

The following is a reconciliation of income available to common shareholders used to calculate income per share for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30				September 30
		2016		2015		2016		2015

Income from continuing operations	$	4,366	$	14,159	$	14,757	$	24,082
Less: Income from continuing operations attributable to
noncontrolling interests		(43)		(82)		(348)		(277)

Income from continuing operations attributable to IHC
common shareholders	$	4,323	$	14,077	$	14,409	$	23,805

Income (loss) from discontinued operations	$	-	$	729	$	109,912	$	1,293
Less: (Income) loss from discontinued operations attributable to
noncontrolling interests		-		(46)		(9,552)		(87)

Income (loss) from discontinued operations attributable to
IHC common shareholders	$	-	$	683	$	100,360	$	1,206

Note 3.

Discontinued Operations

On March 31, 2016, IHC and its subsidiary Independence American sold the stock of Risk Solutions to Swiss Re Corporate Solutions, a division of Swiss Re (“Swiss Re”). In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is co-insured by Westport Insurance Corporation (“Westport”), Swiss Re’s largest US carrier, as of January 1, 2016. The aggregate purchase price was $152,500,000 in cash, subject to adjustments and settlements. Approximately 89% of the purchase price was allocated to AMIC, with the balance being paid to Standard Security Life and other IHC subsidiaries. The Company recorded a gain of $99,934,000, net of taxes and amounts attributable to noncontrolling interests, as a result of the transaction. The aforementioned transaction, which includes the sale of Risk Solutions and the corresponding coinsurance agreement, is collectively referred to as the “Risk Solutions Sale and Coinsurance Transaction”. IHC’s block of Medical Stop-Loss business is in run-off. The sale of Risk Solutions and exit from the medical stop-loss business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The disposal transaction qualifies for reporting as discontinued operations in the first quarter of 2016 as a result of the Board of Directors commitment to a plan for its disposal in January 2016. Aside from reinsurance and marketing of Westport small group stop-loss, there will be no further involvement with the discontinued operation.

The following is a reconciliation of the major line items constituting the pretax profit of discontinued operations for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Revenue	$	-	$	645	$	6,406	$	1,895
Selling, general and administrative expenses		-		(660)		5,689		(359)

Pretax profit (loss) of discontinued operations		-		1,305		717		2,254
Gain on disposal of discontinued
operations, pretax		-		-		116,919		-

Income (loss) from discontinued operations,
before income taxes		-		1,305		117,636		2,254
Income taxes (benefits) on discontinued operations		-		576		7,724		961

Income (loss) from discontinued operations	$	-	$	729	$	109,912	$	1,293

The following is a reconciliation of the carrying amounts of major classes of assets and liabilities for discontinued operations for the periods indicated (in thousands):


		September 30, 2016		December 31, 2015

Major classes of assets included in discontinued operations:
Cash	$	-	$	1,671
Goodwill		-		5,664
Intangible assets		-		919
Other assets		-		4,677

Assets attributable to discontinued operations	$	-	$	12,931

Major classes of liabilities included in discontinued operations:
Accounts payable and accrued liabilities	$	408	$	(15)

Liabilities attributable to discontinued operations	$	408	$	(15)

Total operating cash flows from discontinued operations for the three months and nine months ended September 30, 2016 were $0 and $339,000, respectively, and were $677,000 and $(385,000) for the three months and nine months ended September 30, 2015, respectively. The Company elected to classify the proceeds received from the sale of discontinued operations in the investing activities section of the Condensed Consolidated Statement of Cash Flows.

In connection with the Risk Solutions Sale and Coinsurance Transaction in March 2016, AMIC utilized a significant amount of its Federal NOL carryforwards and made a corresponding adjustment to its valuation allowance (see Note 10). On a consolidated basis, the Company recorded income taxes on discontinued operations of $7,724,000 for the nine months ended September 30, 2016, consisting of $5,777,000 of state taxes and $1,947,000 of Federal taxes, net of a $38,419,000 decrease in AMIC’s valuation allowance.

Note 4.

Investment Securities

The cost (amortized cost with respect to certain fixed maturities), gross unrealized gains, gross unrealized losses and fair value of investment securities are as follows for the periods indicated (in thousands):


		September 30, 2016
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	200,741	$	2,307	$	(1,431)	$	201,617
CMOs - residential ⁽¹⁾		6,295		68		-		6,363
U.S. Government obligations		33,819		292		(26)		34,085
Agency MBS - residential ⁽²⁾		25		1		-		26
GSEs ⁽³⁾		10,401		1		(222)		10,180
States and political subdivisions		199,031		4,932		(984)		202,979
Foreign government obligations		5,618		93		(58)		5,653
Redeemable preferred stocks		11,454		92		(101)		11,445

Total fixed maturities	$	467,384	$	7,786	$	(2,822)	$	472,348


EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	2,717	$	301	$	-	$	3,018
Nonredeemable preferred stocks		3,588		98		(19)		3,667

Total equity securities	$	6,305	$	399	$	(19)	$	6,685


		December 31, 2015
				GROSS		GROSS
		AMORTIZED		UNREALIZED		UNREALIZED		FAIR
		COST		GAINS		LOSSES		VALUE

FIXED MATURITIES
AVAILABLE-FOR-SALE:
Corporate securities	$	172,621	$	93	$	(5,868)	$	166,846
CMOs - residential ⁽¹⁾		3,068		2		(14)		3,056
CMOs - commercial		899		296		-		1,195
U.S. Government obligations		44,738		120		(64)		44,794
Agency MBS - residential ⁽²⁾		34		1		-		35
GSEs ⁽³⁾		11,814		2		(254)		11,562
States and political subdivisions		194,364		2,159		(1,857)		194,666
Foreign government obligations		2,318		12		(6)		2,324
Redeemable preferred stocks		4,036		101		(14)		4,123

Total fixed maturities	$	433,892	$	2,786	$	(8,077)	$	428,601


EQUITY SECURITIES
AVAILABLE-FOR-SALE:
Common stocks	$	4,926	$	-	$	(142)	$	4,784
Nonredeemable preferred stocks		3,588		56		(2)		3,642

Total equity securities	$	8,514	$	56	$	(144)	$	8,426

(1)

Collateralized mortgage obligations (“CMOs”).

(2)

Mortgage-backed securities (“MBS”).

(3)

Government-sponsored enterprises (“GSEs”) are private enterprises established and chartered by the Federal Government or its various insurance and lease programs which carry the full faith and credit obligation of the U.S. Government.

The amortized cost and fair value of fixed maturities available-for-sale at September 30, 2016, by contractual maturity, are shown below (in thousands). 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. CMOs and MBSs are shown separately, as they are not due at a single maturity.


		AMORTIZED		FAIR
		COST		VALUE

Due in one year or less	$	11,684	$	11,681
Due after one year through five years		112,394		112,991
Due after five years through ten years		154,702		157,923
Due after ten years		171,883		173,184
CMOs and MBSs		16,721		16,569

	$	467,384	$	472,348

The following tables summarize, for all available-for-sale securities in an unrealized loss position, the aggregate fair value and gross unrealized loss by length of time those securities that have continuously been in an unrealized loss position for the periods indicated (in thousands):


		September 30, 2016

		Less than 12 Months				12 Months or Longer				Total

		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses

Corporate securities	$	24,023	$	225	$	30,032	$	1,206	$	54,055	$	1,431
U.S. Government obligations		18,229		26		-		-		18,229		26
GSEs		-		-		10,160		222		10,160		222
States and political subdivisions		38,919		363		24,875		621		63,794		984
Foreign government obligations		3,666		58		-		-		3,666		58
Redeemable preferred stocks		-		-		3,662		101		3,662		101
Total fixed maturities		84,837		672		68,729		2,150		153,566		2,822

Nonredeemable preferred stocks		1,308		19		-		-		1,308		19
Total equity securities		1,308		19		-		-		1,308		19

Total temporarily impaired
securities	$	86,145	$	691	$	68,729	$	2,150	$	154,874	$	2,841

Number of securities in an
unrealized loss position		39				28				67


		December 31, 2015

		Less than 12 Months				12 Months or Longer				Total

		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
		Value		Losses		Value		Losses		Value		Losses

Corporate securities	$	101,903	$	2,559	$	55,217	$	3,309	$	157,120	$	5,868
CMO’s - residential		2,867		14		-		-		2,867		14
U.S. Government obligations		19,809		64		-		-		19,809		64
GSEs		6,539		128		4,997		126		11,536		254
States and political subdivisions		68,898		780		31,351		1,077		100,249		1,857
Foreign government obligations		484		6		-		-		484		6
Redeemable preferred stocks		3,749		14		-		-		3,749		14
Total fixed maturities		204,249		3,565		91,565		4,512		295,814		8,077

Common stocks		4,784		142		-		-		4,784		142
Nonredeemable preferred stocks		1,324		2		-		-		1,324		2
Total equity securities		6,108		144		-		-		6,108		144

Total temporarily impaired
securities	$	210,357	$	3,709	$	91,565	$	4,512	$	301,922	$	8,221

Number of securities in an
unrealized loss position		99				31				130

Substantially all of the unrealized losses on fixed maturities available-for-sale at September 30, 2016 and December 31, 2015 relate to investment grade securities and are attributable to changes in market interest rates. Because the Company does not intend to sell, nor is it more likely than not that the Company will have to sell such investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2016 .

Net realized investment gains are as follows for periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Available-for-sale securities:
Fixed maturities	$	2,226	$	122	$	3,847	$	3,536
Common stocks		220		-		220		1,465
Total sales of available-for-sale securities		2,446		122		4,067		5,001

Trading securities		-		(703)		-		(1,124)
Total realized gains		2,446		(581)		4,067		3,877

Unrealized gains (losses) on trading securities:
Change in unrealized gains (losses) on trading securities		(80)		(530)		(124)		(882)
Total unrealized gains (losses) on trading securities		(80)		(530)		(124)		(882)

Gains (losses) on other investments		1		2		2		(4)

Net realized investment gains	$	2,367	$	(1,109)	$	3,945	$	2,991

For the three months and nine months ended September 30, 2016, proceeds from sales of available-for-sale securities were $179,735,000 and $339,171,000, respectively, and the Company realized gross gains of $2,668,000 and $4,521,000, respectively, and gross losses of $94,000 and $275,000, respectively, on those sales. For the three months and nine months ended September 30, 2015, proceeds from sales of available-for-sale securities were $226,350,000 and $612,363,000, respectively, and the Company realized gross gains of $301,000 and $6,074,000, respectively, and gross losses of $148,000 and $790,000, respectively, on those sales.

Other-Than-Temporary Impairment Evaluations

We recognize other-than-temporary impairment losses in earnings in the period that we determine: 1) we intend to sell the security; 2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or 3) the security has a credit loss. Any non-credit portion of the other-than-temporary impairment loss is recognized in other comprehensive income (loss). See Note 1H(iv) to the Consolidated Financial Statements in the 2015 Annual Report for further discussion of the factors considered by management in its regular review to identify and recognize other-than-temporary impairments on available-for-sale securities. In the three months and nine months ended September 30, 2016, the Company recognized an other-than-temporary impairment loss of $1,475,000 on certain fixed maturities available-for-sale due to credit losses. The Company determined it is more likely than not that we will sell the securities before recovery of their amortized cost basis. The Company recognized $228,000 of other-than-temporary impairment losses in earnings on equity securities available-for-sale during the three months and nine months ended September 30, 2015 due to the length of time and extent an equity security was below cost.

Credit losses were recognized on certain fixed maturities for which each security also had an impairment loss recognized in other comprehensive income (loss). The rollforward of these credit losses were as follows for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Balance at beginning of year	$	-	$	473	$	473	$	473
Securities sold		-		-		(473)		-

Balance at end of period	$	-	$	473	$	-	$	473

Note 5.

Fair Value Disclosures

For all financial and non-financial assets and liabilities accounted for at fair value on a recurring basis, the Company utilizes valuation techniques based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market expectations. These two types of inputs create the following fair value hierarchy:

Level 1 - Quoted prices for identical instruments in active markets.

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 - Instruments where significant value drivers are unobservable.

The following section describes the valuation methodologies we use to measure different assets at fair value.

Investments in fixed maturities and equity securities:

Available-for-sale securities included in Level 1 are equities with quoted market prices. Level 2 is primarily comprised of our portfolio of government securities, agency mortgage-backed securities, corporate fixed income securities, foreign government obligations, collateralized mortgage obligations, municipals and GSEs that were priced with observable market inputs. Level 3 securities consist primarily of CMO securities backed by commercial mortgages and municipal tax credit strips. For these securities, we use industry-standard pricing methodologies, including discounted cash flow models, whose inputs are based on management’s assumptions and available market information. Significant unobservable inputs used in the fair value measurement of CMO’s are prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for loss severity and a directionally opposite change in the assumption used for prepayment rates. Further we retain independent pricing vendors to assist in valuing certain instruments.

Trading securities:

Trading securities included in Level 1 are equity securities with quoted market prices.

Contingent liabilities:

Contingent liabilities classified in Level 3 include; (i) a contingent liability assumed in connection with an acquisition related to an earn-out agreement whereby significant unobservable inputs are based on projected income; and (ii) a contingent liability recognized in connection with the deconsolidation of a former subsidiary and a newly formed joint venture transaction whereby significant unobservable inputs are based on projected cash flows.

The following tables present our financial assets and liabilities measured at fair value on a recurring basis for the periods indicated (in thousands):


		September 30, 2016
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	201,617	$	-	$	201,617
CMOs - residential		-		6,363		-		6,363
US Government obligations		-		34,085		-		34,085
Agency MBS - residential		-		26		-		26
GSEs		-		10,180		-		10,180
States and political subdivisions		-		200,909		2,070		202,979
Foreign government obligations		-		5,653		-		5,653
Redeemable preferred stocks		11,445		-		-		11,445
Total fixed maturities		11,445		458,833		2,070		472,348

Equity securities available-for-sale:
Common stocks		3,018		-		-		3,018
Nonredeemable preferred stocks		3,667		-		-		3,667
Total equity securities		6,685		-		-		6,685

Trading securities - equities		1,135		-		-		1,135
Total trading securities		1,135		-		-		1,135

Total Financial Assets	$	19,265	$	458,833	$	2,070	$	480,168

FINANCIAL LIABILITIES:
Contingent liabilities	$	-	$	-	$	356	$	356

Total Financial Liabilities	$	-	$	-	$	356	$	356


		December 31, 2015
		Level 1		Level 2		Level 3		Total

FINANCIAL ASSETS:
Fixed maturities available-for-sale:
Corporate securities	$	-	$	166,846	$	-	$	166,846
CMOs - residential		-		3,056		-		3,056
CMOs - commercial		-		-		1,195		1,195
US Government obligations		-		44,794		-		44,794
Agency MBS - residential		-		35		-		35
GSEs		-		11,562		-		11,562
States and political subdivisions		-		192,487		2,179		194,666
Foreign government obligations		-		2,324		-		2,324
Redeemable preferred stocks		4,123		-		-		4,123
Total fixed maturities		4,123		421,104		3,374		428,601

Equity securities available-for-sale:
Common stocks		4,784		-		-		4,784
Nonredeemable preferred stocks		3,642		-		-		3,642
Total equity securities		8,426		-		-		8,426

Trading securities - equities		1,259		-		-		1,259
Total trading securities		1,259		-		-		1,259

Total Financial Assets	$	13,808	$	421,104	$	3,374	$	438,286

FINANCIAL LIABILITIES:
Interest rate swap	$	-	$	11	$	-	$	11
Contingent liabilities		-		-		1,650		1,650
Total Financial Liabilities	$	-	$	11	$	1,650	$	1,661

It is the Company’s policy to recognize transfers of assets and liabilities between levels of the fair value hierarchy at the end of a reporting period. The Company does not transfer out of Level 3 and into Level 2 until such time as observable inputs become available and reliable or the range of available independent prices narrow.

The Company did not transfer any securities between Level 1, Level 2 or Level 3 in either 2016 or 2015. The following tables present the changes in fair value of our Level 3 financial instruments for the periods indicated (in thousands):


		Three Months Ended September 30, 2016
		Financial Assets:				Financial Liabilities:
		States and		Total				Total
		Political		Level 3		Contingent		Level 3
		Subdivisions		Assets		Liabilities		Liabilities

Beginning balance	$	2,107	$	2,107	$	1,445	$	1,445

Increases (decreases) recognized in earnings:
Net investment income		-		-		(204)		(204)
Other income		-		-		(185)		(185)

(Gains) losses included in other
comprehensive income (loss):
Net unrealized gains (losses)		(10)		(10)		-		-

Payment of contingent liability		-		-		(700)		(700)
Repayments and amortization of
fixed maturities		(27)		(27)		-		-
Sales		-		-		-		-

Balance at end of period	$	2,070	$	2,070	$	356	$	356


		Nine Months Ended September 30, 2016
		Financial Assets:						Financial Liabilities:
				States and		Total				Total
		CMOs		Political		Level 3		Contingent		Level 3
		Commercial		Subdivisions		Assets		Liabilities		Liabilities

Beginning balance	$	1,195	$	2,179	$	3,374	$	1,650	$	1,650

Increases (decreases) recognized in earnings:
Net investment income		-		-		-		(947)		(947)
Net realized investment gains		141		-		141		-		-
Other income		-		-		-		353		353

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		(296)		(31)		(327)		-		-

Payment of contingent liability		-		-				(700)		(700)
Repayments and amortization of
fixed maturities		(74)		(78)		(152)		-		-
Sales		(966)		-		(966)		-		-

Balance at end of period	$	-	$	2,070	$	2,070	$	356	$	356


		Three Months Ended September 30, 2015
		Financial Assets:						Financial Liabilities:
				States and		Total				Total
		CMOs-		Political		Level 3		Contingent		Level 3
		Commercial		Subdivisions		Assets		Liabilities		Liabilities

Beginning balance	$	1,233	$	2,248	$	3,481	$	1,000	$	1,000

Increases (decreases) recognized in earnings:
Gain on sale of subsidiary to
joint venture		-		-		-		1,281		1,281
Net investment income		-		-		-		(102)		(102)

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		45		(11)		34		-		-

Repayments and amortization of
of fixed maturities		-		(22)		(22)		-		-

Balance at end of period	$	1,278	$	2,215	$	3,493	$	2,179	$	2,179


		Nine Months Ended September 30, 2015
		Financial Assets:						Financial Liabilities:
				States and		Total				Total
		CMOs		Political		Level 3		Contingent		Level 3
		Commercial		Subdivisions		Assets		Liabilities		Liabilities

Beginning Balance	$	953	$	2,314	$	3,267	$	-	$	-

Assumed in acquisition		-		-		-		1,000		1,000

Increases (decreases) recognized in earnings:
Gain on sale of subsidiary to
joint venture		-		-		-		1,281		1,281
Net investment income		-		-		-		(102)		(102)

Gains (losses) included in other
comprehensive income (loss):
Net unrealized gains (losses)		325		(36)		289		-		-

Repayments and amortization of
fixed maturities		-		(63)		(63)		-		-

Balance at end of period	$	1,278	$	2,215	$	3,493	$	2,179	$	2,179

The following table provides carrying values, fair values and classification in the fair value hierarchy of the Company’s financial instruments, for the periods indicated, that are not carried at fair value but are subject to fair value disclosure requirements, for the periods indicated (in thousands):


		September 30, 2016				December 31, 2015
		Level 2				Level 2
		Fair		Carrying		Fair		Carrying
		Value		Value		Value		Value

FINANCIAL ASSETS:
Policy loans	$	38	$	38	$	38	$	38

FINANCIAL LIABILITIES:
Funds on deposit	$	150,889	$	150,651	$	173,625	$	173,350
Debt and junior subordinated
debt securities	$	38,146	$	38,146	$	43,283	$	43,335

The following methods and assumptions were used to estimate the fair value of the financial instruments that are not carried at fair value in the Condensed Consolidated Financial Statements:

(A)

Policy Loans

The fair value of policy loans included in Level 2 of the fair value hierarchy is estimated by projecting aggregate loan cash flows to the end of the expected lifetime period of the life insurance business at the average policy loan rates, and discounting them at a current market interest rate.

(B)

Funds on Deposit

The Company has two types of funds on deposit. The first type is credited with a current market interest rate, resulting in a fair value which approximates the carrying amount. The second type carries fixed interest rates which are higher than current market interest rates. The fair value of these deposits was estimated by discounting the payments using current market interest rates. The Company's universal life policies are also credited with current market interest rates, resulting in a fair value which approximates the carrying amount. Both types of funds on deposit are included in Level 2 of the fair value hierarchy.

(C)

Debt

The fair value of debt with variable interest rates approximates its carrying amount and is included in Level 2 of the fair value hierarchy.

Note 6.

Variable Interest Entities

The Company has a noncontrolling interest in certain limited partnerships that we have determined to be Variable Interest Entities (“VIEs”). The aforementioned VIEs are not required to be consolidated in the Company’s condensed consolidated financial statements as we are not the primary beneficiary since we do not have the power to direct the activities that most significantly impact the VIEs’ economic performance.

The Company will periodically reassess whether we are the primary beneficiary in any of these investments. The reassessment process will consider whether we have acquired the power to direct the most significant activities of the VIE through changes in governing documents or other circumstances. Our maximum loss exposure is limited to our combined $9,207,000 carrying value in these equity investments and we have no future funding obligations to them. These investments are included in other investments in the Condensed Consolidated Balance Sheet as of September 30, 2016.

Note 7.

Related Party Transactions

Through a joint venture consummated in 2015, the Company has a significant equity interest in Ebix Health Exchange. Ebix Health Exchange administers various lines of health insurance for IHC’s insurance subsidiaries. Effective July 1, 2016, Ebix, Inc. (“Ebix”) a non-related party and international supplier of On-Demand software and E-commerce services to the insurance, financial and healthcare industries, exercised its right to increase its ownership in Ebix Health Exchange thereby purchasing an additional 11% of Ebix Health Exchange for $2,000,000. As a result of the transaction, the Company’s ownership interest in Ebix Health Exchange decreased to 49%. IHC and Ebix have equal voting interest on the Board of Managers of Ebix Health Exchange. IHC is obligated to fund any negative cash flow through December 31, 2016 in the form of a loan to the joint venture. Any remaining balance of the loan at December 31, 2016 will be converted to capital.

The carrying value of the Company’s equity investment in Ebix Health Exchange was $6,123,000 and $9,838,000 at September 30, 2016 and December 31, 2015, respectively. Ebix Health Exchange reported a net loss of $468,000 and $1,656,000 for the three months and nine months ended September 30, 2016, respectively. The Company recorded $264,000 and $709,000 of the losses in earnings for the three months and nine months ended September 30, 2016, respectively; and reduced the contingent liability, previously recognized on the acquisition date, by $204,000 and $947,000, respectively, during the three months and nine months ended September 30, 2016 representing cash operating losses.

The Company’s Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 include $3,649,000 and $1,397,000, respectively, of notes and other amounts receivable from Ebix Health Exchange, and include $2,936,000 and $405,000, respectively, of administrative fees and other expenses payable to Ebix Health Exchange, which are included in other assets and accounts payable, accruals and other liabilities, respectively. The Company’s Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2016 include $86,000 and $288,000, respectively, of fee income from Ebix Health Exchange, and include $1,547,000 and $4,132,000, respectively, of administrative fee expenses to Ebix Health Exchange, which are included in fee income and selling, general and administrative expenses. The Company’s Condensed Consolidated Statements of Income include $25,000 in fee income from, and $362,000 of administrative fee expenses to, Ebix Health Exchange which are included in fee income and selling, general and administrative expenses, respectively, for the three months and nine months ended September 30, 2015.

Note 8.

Deconsolidation

On September 30, 2016, the Company sold the assets and the stock of its wholly owned subsidiary, Accident Insurance Services, Inc. (“AIS”), to unrelated parties for an aggregate $9,000,000 of cash. Upon the sale, AIS was deconsolidated from the Company’s financial statements. The Company recognized a loss of $614,000 on the transaction, pre-tax, which is included in Other Income on the Consolidated Statement of Income. The loss was measured as the difference between the fair value of the consideration received and: (i) the carrying amount of the former subsidiary’s assets and liabilities, including certain intangible assets (see Note 9); (ii) the write off of associated goodwill (see Note 9), and (iii) other expenses directly attributable to the transaction. There will be no further involvement with AIS other than with respect to the run-out of the business it produced for our insurance companies.

Note 9.

Goodwill and Other Intangible Assets

Certain prior year balances of goodwill and intangible assets were reclassified to assets attributable to discontinued operations on the accompanying Condensed Consolidated Balance Sheet as of December 31, 2015 to conform to the 2016 presentation (see Notes 1 and 3).

The carrying amount of goodwill was $41,573,000 and $47,276,000, respectively, at September 30,

2016 and December 31, 2015. In September 2016, the Company wrote off $5,703,000 off goodwill associated with the Specialty Health segment in connection with the sale of a subsidiary. See discussion in Note 8.

The Company has net other intangible assets of $9,308,000 and $14,598,000 at September 30, 2016 and December 31, 2015, respectively, which are included in other assets in the Condensed Consolidated Balance Sheets. These intangible assets consist of: (i) finite-lived intangible assets, principally the fair value of acquired agent and broker relationships, which are subject to amortization; and (ii) indefinite-lived intangible assets which consist of the estimated fair value of insurance licenses that are not subject to amortization.

The gross carrying amounts of these other intangible assets are as follows for the periods indicated (in thousands):


		September 30, 2016				December 31, 2015
		Gross				Gross
		Carrying		Accumulated		Carrying		Accumulated
		Amount		Amortization		Amount		Amortization

Finite-lived Intangible Assets:
Agent and broker relationships	$	13,052	$	11,721	$	18,201	$	12,497
Trademarks		-		-		1,000		83
Total finite-lived	$	13,052	$	11,721	$	19,201	$	12,580


		September 30,		December 31,
		2016		2015
Indefinite-lived Intangible Assets:
Insurance licenses	$	7,977	$	7,977
Total indefinite-lived	$	7,977	$	7,977

As a result of the sale of a subsidiary discussed in Note 8, net intangible assets associated with the specialty health segment decreased $4,233,000.

Amortization expense was $366,000 and $1,057,000 for the three months and nine months ended September 30, 2016, respectively, and was $425,000 and $1,070,000 for the three months and nine months ended September 30, 2015.

Note 10.

Income Taxes

The provisions for income taxes shown in the Condensed Consolidated Statements of Income were computed based on the Company's actual results, which approximate the effective tax rate expected to be applicable for the balance of the current fiscal year in accordance with consolidated life/non-life group income tax regulations. Such regulations adopt a subgroup method in determining consolidated taxable income, whereby taxable income is determined separately for the life insurance company group and the non-life insurance company group.

As a result of the Risk Solutions Sale and Coinsurance Transaction (see Note 3), AMIC utilized approximately $109,770,000 of its operating loss carryforwards. At September 30, 2016, AMIC had remaining net operating loss carryforwards of approximately $144,749,000 for federal income tax purposes, which expire in varying amounts through the year 2028, with a significant portion expiring in 2020.

Note 11.

Reinsurance

Effective January 1, 2016, all of the in-force stop-loss business of Standard Security Life and

Independence American produced by Risk Solutions was co-insured in connection with the Risk Solutions Sale and Coinsurance Transaction (see Note 3). As a result of this transaction, amounts due from reinsurers includes $52,235,000 due from Westport at September 30, 2016; premiums earned from the Medical Stop-Loss segment was $2,668,000 and $10,671,000 for the three months and nine months ended September 30, 2016, respectively, compared to $52,040,000 and $157,029,000 for the comparable periods in 2015; and, insurance benefits, claims and reserves for the Medical Stop-Loss segment were $3,508,000 and $9,875,000 for the three months and nine months ended September 30, 2016, respectively, compared to $37,369,000 and $115,032,000 for the comparable periods in 2015.

The Company is contingently liable with respect to reinsurance in the unlikely event that the assuming reinsurers are unable to meet their obligations. The ceding of reinsurance does not discharge the primary liability of the original insurer to the insured.

Note 12.

Debt and Junior Subordinated Debt Securities

In 2016, the Company made aggregate cash payments of $4,789,000 for the repayment of debt. The remaining $400,000 of debt is included in other liabilities on the Condensed Consolidated Balance Sheet at September 30, 2016.

Subsequent to the balance sheet date, in October 2016, the Company redeemed $22,682,000 of its junior subordinated debt securities and has given notice that it will redeem the remaining junior subordinated debt securities in December 2016.

Note 13.

Stockholders’ Equity

Treasury Stock

In 2016, IHC repurchased an aggregate 215,000 shares of its common stock in various private transactions for $3,522,000.

Accumulated Other Comprehensive Income (Loss)

Other comprehensive income (loss) includes the after-tax net unrealized gains and losses on investment securities available-for-sale, including the subsequent increases and decreases in fair value of available-for-sale securities previously impaired and the non-credit related component of other-than-temporary impairments of fixed maturities.

Changes in the balances of accumulated other comprehensive income, shown net of taxes, for the periods indicated were as follows (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Beginning balance	$	4,054	$	(3,217)	$	(3,440)	$	22

Other comprehensive income (loss) before reclassifications		(182)		1,854		8,522		1,765
Amounts reclassified from accumulated OCI		(573)		68		(1,618)		(3,077)
Net other comprehensive income		(755)		1,922		6,904		(1,312)

Less: Other comprehensive income attributable
to noncontrolling interests		47		(51)		(118)		(61)
Acquired from noncontrolling interests		102		-		102		5

Ending balance	$	3,448	$	(1,346)	$	3,448	$	(1,346)

Presented below are the amounts reclassified out of accumulated other comprehensive income (loss) and recognized in earnings for each of the periods indicated (in thousands):


			Three Months Ended					Nine Months Ended
			September 30,					September 30,
		2016			2015		2016			2015

Unrealized gains (losses) on available-for-sale securities
reclassified during the period to the following income
statement line items:
Net realized investment gains	$	2,446		$	122	$	4,067		$	5,001
Net impairment losses recognized in earnings		(1,475)			(228)		(1,475)			(228)

Income (loss) before income tax		971			(106)		2,592			4,773
Tax effect		398			(38)		974			1,696

Net income (loss)	$	573		$	(68)	$	1,618		$	3,077

Note 14.

Share-Based Compensation

IHC and AMIC each have share-based compensation plans. The following is a summary of the activity pertaining to each of these plans.

A) IHC’s Share-Based Compensation Plans

Under the terms of IHC’s stock-based compensation plan, option exercise prices are more than or equal to the quoted market price of the shares at the date of grant; option terms are generally five years; and vesting periods are generally three years. The fair value of an option award is estimated on the date of grant using the Black-Scholes option valuation model. In addition to stock options, the Company has also granted restricted stock units and share appreciation rights (“SARs”) under the plan. Restricted share units are valued at the quoted market price of the shares at the date of grant and have a three-year vesting period. Compensation costs for options and restricted share units are recognized over the stated vesting periods on a straight-line basis. Exercise prices of SARs are more than or equal to the quoted market price of IHC shares at the date of the grant and have three year vesting periods. The fair value of SARs is calculated using the Black-Scholes valuation model at the grant date and each subsequent reporting period until settlement. Compensation cost is based on the proportionate amount of the requisite service that has been rendered to date. Once fully vested, changes in fair value of the SARs continue to be recognized as compensation expense in the period of the change until settlement.

At September 30, 2016, there were no shares available for future stock-based compensation grants under IHC’s stock incentive plans. The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income, applicable to the IHC plans, by award type for each of the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
IHC’s Share-based Compensation Plan:
Stock options	$	-	$	-	$	170	$	55
Restricted stock units		16		23		60		67
SARs		(57)		(23)		410		(80)

Share-based compensation expense, pre-tax		(41)		-		640		42
Tax benefits		(16)		-		255		17

Share-based compensation expense, net	$	(25)	$	-	$	385	$	25

Stock Options

The IHC’s stock option activity during 2016 was as follows:


	Shares	Weighted- Average
	Under Option	Exercise Price

December 31, 2015	584,080	$	9.35
Exercised	(9,250)		9.09
September 30, 2016	574,830	$	9.35

In 2016, option agreements affecting 13 employees were modified to extend the expirations of their terms from 2017 to 2019 and as a result, the Company recorded incremental compensation costs of $170,000. In 2016, IHC received $84,000 in cash from the exercise of stock options with an aggregate intrinsic value of $67,000 and realized $15,000 of tax benefits.

The following table summarizes information regarding IHC’s outstanding and exercisable options:


		September 30, 2016
		Outstanding		Exercisable

Number of options		574,830		574,830
Weighted average exercise price per share	$	9.35	$	9.35
Aggregate intrinsic value for all options (in thousands)	$	4,501	$	4,501
Weighted average contractual term remaining		2.0 years		2.0 years

As of September 30, 2016, all of IHC’s outstanding stock options are fully vested and all of the related compensation costs have been recognized.

Restricted Stock

The following table summarizes restricted stock activity for the nine months ended September 30, 2016:


	No. of	Weighted-Average
	Non-vested	Grant-Date
	Shares	Fair Value

December 31, 2015	14,850	$	12.26
Vested	(7,425)		12.24

September 30, 2016	7,425	$	12.28

The total fair value of restricted stock that vested during the first nine months of 2016 and 2015 was $120,000 and $89,000, respectively. No restricted stock awards were granted in 2016. In 2015, IHC granted 7,425 restricted stock awards during the nine months ended September 30 with weighted average grant-date fair values of $11.78.

As of September 30, 2016, the total unrecognized compensation expense related to non-vested restricted stock unit awards was $69,000 which is expected to be recognized over the remaining requisite weighted-average service period of 1.3 years.

SARs

IHC had 73,150 and 125,850 of SAR awards outstanding at September 30, 2016 and December 31, 2015, respectively. In 2016, 52,700 SARs were exercised with an aggregate intrinsic value of $436,000. Included in Other Liabilities in the Company’s Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015 are liabilities of $718,000 and $743,000, respectively, pertaining to SARs.

AMIC Share-Based Compensation Plans

As a result of a short-form merger discussed in Note 1 (B), the existing stock-based compensation plan of AMIC was terminated. Under the terms of AMIC’s stock-based compensation plan prior to its termination, option exercise prices were equal to the quoted market price of the shares at the date of grant; option terms were ten years; and vesting periods ranged from three to four years.

The following table summarizes share-based compensation expense, which is included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income, applicable to AMIC’s share-based compensation plan prior to its termination, by award type for each of the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
AMIC’s Share-based Compensation Plans:
Stock options	$	11	$	11	$	21	$	32

Share-based compensation expense, pre-tax		11		11		21		32
Tax benefits		4		4		7		11

Share-based compensation expense, net	$	7	$	7	$	14	$	21

Stock Options

AMIC’s stock option activity for the nine months ended September 30, 2016 is as follows:


	Shares	Weighted- Average
	Under Option	Exercise Price

December 31, 2015	71,558	$	8.88
Exercised	(30,446)		8.62
Cancelled	(41,112)		9.07
September 30, 2016	-	$	-

In 2016, AMIC received $262,000 in cash from the exercise of stock options with an aggregate intrinsic value of $212,000. In connection with the short-form merger transaction discussed in Note 1 (B), option agreements affecting 7 employees and directors were cancelled and as a result, the Company recorded incremental compensation costs of $646,000. These costs were accounted for as part of the equity transaction to take AMIC private.

Note 15.

Supplemental Disclosures of Cash Flow Information

Net cash payments (receipts) for Federal and state income taxes were $11,312,000 and $2,800,000 during the nine months ended September 30, 2016 and 2015, respectively.

Cash payments for interest were $1,422,000 and $1,318,000 during the nine months ended September 30, 2016 and 2015, respectively.

Note 16.

Segment Reporting

The Company has renamed its “Fully Insured” segment “Specialty Health”. Specialty Health more accurately reflects the niche nature of the products that IHC markets in this segment and continues to expand into since its exit from the major medical market.

The Insurance Group principally engages in the life and health insurance business. Information by business segment is presented below for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015
Revenues:
Medical Stop-Loss ^(A)	$	5,433	$	53,320	$	21,397	$	160,310
Specialty Health		44,684		45,193		126,454		141,356
Group disability, life and DBL		26,196		24,404		77,409		65,879
Individual life, annuities and other ^(A)		717		7,987		2,053		25,287
Corporate		620		45		2,350		137
		77,650		130,949		229,663		392,969
Gain on sale of subsidiary to joint venture		-		10,161		-		10,161
Net realized investment gains (losses)		2,367		(1,109)		3,945		2,991
Net impairment losses recognized in earnings		(1,475)		(228)		(1,475)		(228)
Total revenues	$	78,542	$	139,773	$	232,133	$	405,893

Income from continuing operations
before income taxes:
Medical Stop-Loss ^(A)	$	2,176	$	5,218	$	13,926	$	14,176
Specialty Health ^(B)		1,369		2,399		3,754		5,231
Group disability, life and DBL		5,323		4,400		13,533		10,774
Individual life, annuities and other ^(A)(C)		(410)		3,623		(1,888)		1,238
Corporate		(1,908)		(2,111)		(7,106)		(5,308)
		6,550		13,529		22,219		26,111
Gain on sale of subsidiary to joint venture		-		10,161		-		10,161
Net realized investment gains (losses)		2,367		(1,109)		3,945		2,991
Net impairment losses recognized in earnings		(1,475)		(228)		(1,475)		(228)
Interest expense		(440)		(444)		(1,366)		(1,354)
Income from continuing operations
before income taxes	$	7,002	$	21,909	$	23,323	$	37,681

(A)

Substantially all of the business in the segment is coinsured. The current year’s activity primarily reflects income or expenses related to the coinsurance and the run-off of any remaining blocks that were not coinsured.

(B)

The Specialty Health segment includes amortization of intangible assets. Total amortization expense was $366,000 and $425,000 for the three months ended September 30, 2016 and 2015, respectively, and was $1,057,000 and $1,070,000, respectively, for the nine months ended September 30, 2016 and 2015. Amortization expense for the other segments is not material to their operating results.

(C)

The Individual life, annuities and other segment includes amortization of deferred charges in connection with the assumptions of certain ceded life and annuity policies amounting to $296,000 and $213,000 for the three months ended September 30, 2016 and 2015, respectively, and $1,949,000 and $629,000 for the nine months ended September 30, 2016 and 2015, respectively.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of operations of Independence Holding Company ("IHC") and its subsidiaries (collectively, the "Company") should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements of the Company and the related Notes thereto appearing in our annual report on Form 10-K for the fiscal year ended December 31, 2015, as filed with the Securities and Exchange Commission, and our unaudited Condensed Consolidated Financial Statements and related Notes thereto appearing elsewhere in this quarterly report.

Overview

Independence Holding Company, a Delaware corporation (“IHC”), is a holding company principally engaged in the life and health insurance business through: (i) its insurance companies, Standard Security Life Insurance Company of New York ("Standard Security Life"), Madison National Life Insurance Company, Inc. ("Madison National Life"), Independence American Insurance Company (“Independence American”); and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. and IHC Carrier Solutions, Inc. IHC also owns a significant equity interest in: (i) Ebix Health Exchange Holdings, LLC (“Ebix Health Exchange”), an administration exchange for health insurance; and (ii) a managing general underwriter (“MGU”) that writes medical stop-loss. On March 31, 2016, the Company sold IHC Risk Solutions, LLC (“Risk Solutions”), its managing general underwriter of excess or stop-loss insurance. In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is 100% co-insured as of January 1, 2016. IHC’s block of Medical Stop-Loss business is in run-off. Standard Security Life, Madison National Life and Independence American are sometimes collectively referred to as the “Insurance Group”. IHC and its subsidiaries (including the Insurance Group) are sometimes collectively referred to as the "Company", or “IHC”, or are implicit in the terms “we”, “us” and “our”.

On August 31, 2016, IHC took AMIC Holdings, Inc. formerly known as American Independence Corp., ("AMIC") private by way of a statutory “short-form" merger and, as a result, IHC indirectly owns all of the outstanding shares of AMIC’s common stock.

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 and DBL; mortality rates with respect to life insurance; and changes in market conditions in general play a significant role in determining the rates charged, deductibles and attachment points quoted, and the percentage of business retained. IHC also seeks transactions that permit it to leverage its vertically integrated organizational structure by generating fee income from production and administrative operating companies as well as risk income for its carriers and profit commissions. Management has always focused on managing the costs of its operations and providing its insureds with the best cost-containment tools available.

The following is a summary of key performance information and events:

The results of operations are summarized as follows for the periods indicated (in thousands):


			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2016		2015		2016		2015

Revenues		$	78,542	$	139,773	$	232,133	$	405,893
Expenses			71,540		117,864		208,810		368,212

Income from continuing operations before income taxes			7,002		21,909		23,323		37,681
Income taxes			2,636		7,750		8,566		13,599

Income from continuing operations			4,366		14,159		14,757		24,082

Income (loss) from discontinued operations			-		729		109,912		1,293

Net income			4,366		14,888		124,669		25,375

Less: Income from noncontrolling interests in subsidiaries			(43)		(128)		(9,900)		(364)

	Net income attributable to IHC	$	4,323	$	14,760	$	114,769	$	25,011

Income from continuing operations of $.25 per share, diluted, for the three months ended September 30, 2016 compared to $.81 per share, diluted, for the same period in 2015. Income from continuing operations of $.83 per share, diluted, for the nine months ended September 30, 2016 compared to $1.36 per share, diluted, for the same period in 2015.

Net income for the three months and nine months ended September 30, 2015 includes a $6.9 million gain, net of tax, resulting from the deconsolidation of a subsidiary and corresponding joint venture transaction; and a gain of $3.3 million, net of tax, on the sale of the infrastructure associated with the administration of substantially all of our individual life and annuity policies ceded during the quarter.

Consolidated investment yields (on an annualized basis) of 2.7% and 2.8% for the three months and nine months ended September 30, 2016 and 2015, respectively, compared to 2.9% and 2.8% for the comparable periods in 2015, respectively;

Book value of $25.72 per common share at September 30, 2016 compared to $18.73 at December 31, 2015.

The following is a summary of key performance information by segment:

The Medical Stop-Loss segment reported income before taxes of $2.2 million and $13.9 million for the third quarter and nine months of 2016, respectively. Income from the Medical Stop-loss segment in 2016 is principally due to ceding commissions on coinsurance due to the sale of Risk Solutions and exit from the medical stop-loss business. Premiums earned and amounts recorded for benefits, claims and reserves in the Medical Stop-Loss segment during 2016 represent the activity of the remaining blocks of medical stop-loss business in run-off. In 2015, the Medical Stop-Loss segment reported income before taxes of $5.2 million and $14.2 million for third quarter and first nine months, respectively.

expand into since its exit from the major medical market. The Specialty Health segment reported $1.4 million of income before taxes for the three months ended September 30, 2016 compared to $2.4 million for the same period in 2015; and reported $3.8 million of income before taxes for the nine months ended September 30, 2016 compared to $5.2 million for the same period in 2015.

For the three months and nine months ended September 30, 2016, premiums earned decreased $2.3 million and $17.0 million over the comparable periods in 2015. Major medical premiums decreased $6.7 million and $26.2 million for the three months and nine months ended September 30, 2016, respectively. As a result of the strategic decision to focus on ancillary products, this decrease was partially offset by increases from broader marketing of our short-term medical, scheduled benefit and gap plans and growth in the pet insurance line of business.

The following is the underwriting experience for the Specialty Health segment, as indicated by its U.S. GAAP Combined Ratios for the periods indicated (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2016		2015		2016		2015

Premiums Earned	$	40,275	$	42,583	$	112,981	$	130,034
Insurance Benefits, Claims & Reserves		21,849		22,331		60,497		71,256
Expenses		17,629		18,542		50,159		52,526

Loss Ratio ^(A)		54.2%		52.4%		53.5%		54.8%
Expense Ratio ^(B)		43.8%		43.5%		44.4%		40.3%
Combined Ratio ^(C)		98.0%		95.9%		97.9%		95.1%

(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.

Although the loss ratio for the nine months ended September 30, 2016 was slightly lower than for such period in 2015, such loss ratio would have been significantly lower (49.0%) excluding the occupational accident line of business. The poor performance of the block underwritten by its occupational accident agency led to the Company’s decision to sell such company and exit that block of business. Expense ratios are higher for the nine months ended September 30, 2016 because of a change in the mix of business from major medical to specialty health products and as a result of the reallocation of certain fixed costs from the medical stop loss line to the specialty health segment.

Income before taxes from the Group disability, life and DBL segment increased $0.9 million and $2.7 million for the three months and nine months ended September 30, 2016, respectively, compared to the same periods in 2015. The overall increase in income for the nine months is primarily due to increased volume and lower loss ratios in the LTD business;

Income before income taxes from the Individual life, annuities and other segment decreased $4.0 million and $3.1 million for the three months and nine months ended September 30, 2016, respectively, primarily due to the ceding of substantially all of the life and annuity blocks in the third quarter of 2015. Current year activity primarily consists of the amortization of the related reinsurance costs whereas prior year activity includes a $5.1 million pre-tax gain recorded in

connection with the sale of infrastructure associated with the administration of substantially all of our individual life and annuity policies ceded during the third quarter of 2015.

Losses before tax from the Corporate segment for the third quarter of 2016 were comparable to the same quarter in 2015. Losses before tax from the Corporate segment for the nine months ended September 30, 2016 increased $1.8 million over the same period in 2015 primarily due to compensation costs that vary with changes in stock price and increased audit and consulting fees; and

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:		2016		2015		2016		2015

Medical Stop-Loss		$	64,684	$	75,029	$	223,609	$	222,599
Specialty Health			42,629		47,048		120,318		142,133
Group disability, life and DBL			31,057		29,124		91,760		86,692
Individual, life, annuities and other			3,898		5,874		12,605		18,286

		$	142,268	$	157,075	$	448,292	$	469,710


			Three Months Ended				Nine Months Ended
			September 30,				September 30,
Net Direct and Assumed
	Earned Premiums:		2016		2015		2016		2015

Medical Stop-Loss		$	2,668	$	52,040	$	10,671	$	157,029
Specialty Health			40,275		42,583		112,981		130,034
Group disability, life and DBL			24,373		22,701		71,842		62,701
Individual, life, annuities and other			19		1,714		30		11,831

		$	67,335	$	119,038	$	195,524	$	361,595

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles ("GAAP"). The preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts 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 December 31, 2015. Management has identified the accounting policies related to Insurance Premium Revenue Recognition and Policy Charges, Insurance Liabilities, Deferred Acquisition Costs, Investments, Goodwill and Other Intangible Assets, and Deferred Income Taxes as those that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of the Company's Consolidated Financial Statements and this Management's Discussion and Analysis. A full discussion of these policies is included under the heading, “Critical Accounting Policies” in Item 7 of the Annual Report on Form 10-K for the fiscal year ended December 31, 2015. During the nine months ended September 30, 2016, there were no additions to or changes in the critical accounting policies disclosed in the 2015 Form 10-K except for the recently adopted accounting standards discussed in Note

1(E) of the Notes to Condensed Consolidated Financial Statements.

Results of Operations for the Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

Information by business segment is as follows for the periods indicated (in thousands):


								Insurance
								Benefits,		Selling,
				Net		Fee and		Claims		General
September 30, 2016		Premiums		Investment		Other		and		and
(In thousands)		Earned		Income		Income		Reserves		Administrative			Total

Medical Stop-Loss		$	2,668	$	(296)	$	3,061	$	3,508	$		(251)	$	2,176
Specialty Health			40,275		1,190		3,219		21,849			21,466		1,369
Group disability,
	life and DBL		24,373		1,680		143		12,652			8,221		5,323
Individual life,
	annuities and other		19		810		(112)		268			859		(410)
Corporate			-		620		-		-			2,528		(1,908)
Sub total		$	67,335	$	4,004	$	6,311	$	38,277	$	32,823			6,550

Net realized investment gains														2,367
Net impairment losses recognized in earnings														(1,475)
Interest expense on debt														(440)
Income from continuing operations before income taxes														7,002
Income taxes														2,636
Income from continuing operations													$	4,366


								Insurance
								Benefits,		Selling,
				Net		Fee and		Claims		General
September 30, 2015		Premiums		Investment		Other		and		and
(In thousands)		Earned		Income		Income		Reserves		Administrative		Total

Medical Stop-Loss		$	52,040	$	1,280	$	-	$	37,369	$	10,733	$	5,218
Specialty Health			42,583		488		2,122		22,331		20,463		2,399
Group disability,
	life and DBL		22,701		1,611		92		12,950		7,054		4,400
Individual life,
	annuities and other		1,714		496		5,777		1,568		2,796		3,623
Corporate			-		45		-		-		2,156		(2,111)
Sub total		$	119,038	$	3,920	$	7,991	$	74,218	$	43,202		13,529

Gain on sale of subsidiary to joint venture													10,161
Net realized investment losses													(1,109)
Net impairment losses recognized in earnings													(228)
Interest expense on debt													(444)
Income from continuing operations before income taxes													21,909
Income taxes													7,750
Income from continuing operations												$	14,159

Premiums Earned

In the third quarter of 2016, premiums earned decreased $51.7 million over the comparable period of 2015. The decrease is primarily due to: (i) a decrease of $49.4 million in the Stop Loss segment as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $2.3 million in the Specialty Health segment principally as a result of a $6.7 million decrease in premiums from exiting the Major Medical line and a $2.1 million decrease in the fixed indemnity limited benefit line, partially offset by premium increases in the short-term medical and pet lines of business of $5.3 million and $1.3 million, respectively, as a result of higher volume; and (iii) a decrease of $1.7 million in the Individual life, annuities and other segment as a result of business in run-off; partially offset by (iv) a $1.7 million increase in earned premiums from the Group disability, life, annuities and DBL segment primarily due to increased volume in the group term life, LTD and DBL lines.

Net Investment Income

Total net investment income increased $0.1 million. The overall annualized investment yields in the third quarter of 2016 and 2015 were 2.5% and 2.9%, respectively. The overall decrease in net investment income and the lower yield in 2016 were primarily due to a decrease in income from partnerships.

The annualized investment yields on bonds, equities and short-term investments in the third quarter of 2016 and 2015 were 2.7% and 2.8%, respectively. IHC has approximately $164.3 million in highly rated shorter duration securities earning on average 1.6%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.

Net Realized Investment Gains and Net Impairment Losses Recognized in Earnings

The Company had net realized investment gains of $2.4 million in 2016 compared to losses of $1.1 million in 2015. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

The Company recognized $1.5 million of other-than-temporary impairment losses on certain fixed maturities available-for-sale during the three months ended September 30, 2016 due to credit losses. The Company determined that it is more likely than not that we will sell the securities before recovery of their amortized cost basis. During the three months ended September 30, 2015, the Company recognized $0.2 million of other-than-temporary impairment losses on equity securities available-for-sale due to the length of time and extent an equity security was below cost.

Fee Income and Other Income

Fee income increased $1.8 million for the three-month period ended September 30, 2016 compared to the three-month period ended September 30, 2015 primarily due to growth in the Specialty Health segment.

Other income in the third quarter of 2016 decreased from the same period in 2015. In 2016, other income primarily includes fees received in connection with the ceding of the Medical Stop Loss business, whereas 2015 includes a $5.1 million pre-tax gain recorded in connection with a coinsurance and sale agreement in the third quarter of 2015 with no comparable amount in 2016.

Insurance Benefits, Claims and Reserves

In the third quarter of 2016, insurance benefits, claims and reserves decreased $35.9 million over the comparable period in 2015. The decrease is primarily attributable to: (i) a decrease of $33.9 million in the Medical Stop Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $0.5 million in the Specialty Health segment, primarily due to a decrease of $4.2 million in benefits, claims and reserves related to the run-off of the Major Medical business, a $0.7 million decrease in fixed indemnity due to lower volume; partially offset by an increase of $3.0 million and $0.7 million in the short term medical and pet lines, respectively, due to increased volume; and (iii) a decrease of $1.3 million in the Individual life, annuity and other segment, primarily as a result of the business being in run-off.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses decreased $10.4 million over the comparable period in 2015. The decrease is primarily attributable to: (i) a decrease of $11.0 million in the Medical Stop Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; and (ii) a decrease of $1.9 million in the Individual life, annuity and other segment largely due to business in run-off; partially offset by (iii) an increase of $1.0 million in the Specialty Health segment primarily due to increased expenses in the short term medical line due to increased volume, partially offset by decreased expenses from the run-off of Major Medical; (iv) an increase of $1.2 million in the group disability, life, annuities and DBL segment primarily due to increased commission and other expenses in the LTD line as a result of higher volume and retentions; and (v) an increase of $0.3 million in Corporate expenses primarily due to higher consulting expenses in 2016.

Income Taxes

The effective tax rate for the three months ended September 30, 2016 was 37.6% compared to 35.4% for the same period in 2015. The increase is primarily the result of taxes recorded in connection with the sale and deconsolidation of certain subsidiaries as a percentage of consolidated pretax income in both the third quarter of 2016 and 2015.

Results of Operations for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

Information by business segment for the periods indicated is as follows (in thousands):


								Insurance
								Benefits,		Selling,
				Net		Fee and		Claims		General
September 30, 2016		Premiums		Investment		Other		and		and
(In thousands)		Earned		Income		Income		Reserves		Administrative		Total

Medical Stop-Loss		$	10,671	$	1,544	$	9,182	$	9,875	$	(2,404)	$	13,926
Specialty Health			112,981		2,253		11,220		60,497		62,203		3,754
Group disability,
	life and DBL		71,842		4,926		641		38,203		25,673		13,533
Individual life,
	annuities and other		30		1,677		346		922		3,019		(1,888)
Corporate			-		2,300		50		-		9,456		(7,106)
Sub total		$	195,524	$	12,700	$	21,439	$	109,497	$	97,947		22,219

Net realized investment gains													3,945
Net impairment losses recognized in earnings													(1,475)
Interest expense on debt													(1,366)
Income from continuing operations before income taxes													23,323
Income taxes													8,566
Income from continuing operations												$	14,757


								Insurance
								Benefits,		Selling,
				Net		Fee and		Claims		General
September 30, 2015		Premiums		Investment		Other		and		And
(In thousands)		Earned		Income		Income		Reserves		Administrative		Total

Medical Stop-Loss		$	157,029	$	3,281	$	-	$	115,032	$	31,102	$	14,176
Specialty Health			130,034		1,625		9,697		71,256		64,869		5,231
Group disability,
	life and DBL		62,701		3,012		166		35,786		19,319		10,774
Individual life,
	annuities and other		11,831		5,775		7,681		11,144		12,905		1,238
Corporate			-		137		-		-		5,445		(5,308)
Sub total		$	361,595	$	13,830	$	17,544	$	233,218	$	133,640		26,111

Gain on sale of subsidiary to joint venture														10,161
Net realized investment gains														2,991
Net impairment losses recognized in earnings														(228)
Interest expense on debt														(1,354)
Income from continuing operations before income taxes														37,681
Income taxes														13,599
Income from continuing operations												$		24,082

Premiums Earned

In the first nine months of 2016, premiums earned decreased $166.1 million over the comparable period of 2015. The decrease is primarily due to: (i) a decrease of $146.4 million in the Stop Loss segment as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $17.0 million in the Specialty Health segment principally as a result of a $26.2 million decrease in premiums from exiting the Major Medical line, a $6.3 million decrease in the fixed indemnity limited benefit line, and a $1.5 million decrease in international medical business premiums due to lower retention, partially offset by premium increases in the short-term medical and pet lines of business of $13.4 million and $3.3 million, respectively, as a result of higher volume; and (iii) a decrease of $11.8 million in the Individual life, annuities and other segment as a result of this business being in run-off; partially offset by

(iv) a $9.1 million increase in earned premiums from the Group disability, life, annuities and DBL segment primarily due to increased volume and retention in the LTD and group term life lines and increased volume in DBL business.

Net Investment Income

Total net investment income decreased $1.1 million. The overall annualized investment yields for the nine months ended September 30, 2016 and 2015 were 2.7% and 2.8%, respectively. The overall decrease was primarily the result of a decrease in investment income on bonds, equities and short-term investments due to cash transferred out in the third quarter of 2015 in connection with a coinsurance and sale transaction, partially offset by cash received in connection with the sale of Risk Solutions in the first quarter of 2016. Additionally, income from partnerships was lower in 2016.

The annualized investment yields on bonds, equities and short-term investments were 2.8% for the first nine months of both 2016 and 2015. IHC has approximately $164.3 million in highly rated shorter duration securities earning on average 1.6%. A portfolio that is shorter in duration enables us, if we deem prudent, the flexibility to reinvest in much higher yielding longer-term securities, which would significantly increase investment income.

Net Realized Investment Gains and Net Impairment Losses Recognized in Earnings

The Company had net realized investment gains of $3.9 million in the first nine months of 2016 compared to $3.0 million in 2015. These amounts include gains and losses from sales of fixed maturities and equity securities available-for-sale and other investments. Decisions to sell securities are based on management's ongoing evaluation of investment opportunities and economic and market conditions, thus creating fluctuations in gains and losses from period to period.

The Company recognized $1.5 million of other-than-temporary impairment losses on certain fixed maturities available-for-sale during the nine months ended September 30, 2016 due to credit losses. The Company determined that it is more likely than not that we will sell the securities before recovery of their amortized cost basis. During the nine months ended September 30, 2015, the Company recognized $0.2 million of other-than-temporary impairment losses on equity securities available-for-sale due to the length of time and extent an equity security was below cost.

Fee Income and Other Income

Fee income increased $3.3 million for the nine-month period ended September 30, 2016 compared to the nine-month period ended September 30, 2015 primarily due to increased fee income related to the increased ownership in an agency holding company partially offset by decreased fees due to the partial sale and deconsolidation of a previously wholly owned Third Party Administrator in the Specialty Health segment.

Other income in the first nine months of 2016 was relatively comparable to the same period in 2015. In 2016, other income primarily includes fees received in connection with the ceding of the Medical Stop Loss business, whereas 2015 includes a gain recorded in connection with the ceding of individual life and annuity policies and sale of the related infrastructure.

Insurance Benefits, Claims and Reserves

In the first nine months of 2016, insurance benefits, claims and reserves decreased $123.7 million over the comparable period in 2015. The decrease is primarily attributable to: (i) a decrease of $105.1 million in the Medical Stop Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3; (ii) a decrease of $10.8 million in the Specialty Health segment, primarily due to a decrease of $19.2 million in benefits, claims and reserves related to the

run-off of the Major Medical business, a $2.6 million decrease due to lower volume in the fixed indemnity business, and a $2.0 million decrease due to lower retention in the international line; partially offset by increases of $3.8 million in claims in the occupational accident lines due to higher claim activity and increases of $7.1 million and $1.6 million in the short term medical and pet lines, respectively, due to the increase in volume of both lines of business; and (iii) a decrease of $10.2 million in the Individual life, annuity and other segment, primarily as a result of business in run-off; partially offset by (iv) a, increase of $2.4 million in benefits, claims and reserves in the group disability, life, annuities and DBL segment, primarily due to an increased retentions and higher loss ratios on LTD lines and increased volume in DBL business.

Selling, General and Administrative Expenses

Total selling, general and administrative expenses decreased $35.7 million over the comparable period in 2015. The decrease is primarily attributable to: (i) a decrease of $33.5 million in the Medical Stop Loss segment primarily as a result of the sale of Risk Solutions and exit from the medical stop-loss business, further described in Note 3, (ii) a decrease of $2.7 million in the Specialty Health segment primarily due to decreased expenses from the run-off of Major Medical, partially offset by an increase in expenses due to increased volume in the short term medical line; and (iii) a decrease of $9.9 million in the Individual life, annuity and other segment largely due to lower general expenses from business in run-off; partially offset by (iv) an increase of $6.3 million in the group disability, life, annuities and DBL segment primarily due to increased commission and other expenses in the LTD line as a result of volume; and (v) an increase of $4.1 million in Corporate principally from higher audit fees, increased compensation costs that vary with changes in stock price, in addition to increased consulting fees in 2016.

Income Taxes

The effective tax rate for the nine months ended September 30, 2016 was 36.7% compared to 36.1% for the same period in 2015. The increase is primarily the result of higher amounts of non-deductible expenses in 2016 as a result of the Affordable Care Act partially offset by an increase in benefits from tax-advantaged securities as a percentage of income in 2016.

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 maturities; and (iii) earnings on investments. Such cash flow is partially used to fund liabilities for insurance policy benefits. These liabilities represent long-term and short-term obligations.

Corporate

Corporate derives its funds principally from: (i) dividends 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. During the nine months ended September 30, 2016, the Insurance Group declared and paid $17.8 million of dividends. No dividends were declared or paid by the Insurance Group during the nine months ended September 30, 2015.

Cash Flows

The Company had $79.2 million and $17.5 million of cash and cash equivalents as of September 30, 2016 and December 31, 2015, respectively.

For the nine months ended September 30, 2016, operating activities of the Company utilized $16.8 million of cash, $108.4 million was provided by investment activities and $30.0 million of cash was utilized for financing activities. The increase in cash from investing is primarily related to the proceeds from the sale of Risk Solutions net of amounts subsequently invested in available-for-sale securities. Financing activities include $18.1 million for the acquisition on AMIC shares in connection with taking AMIC private, $4.8 million utilized for the repayment of debt, $1.6 million for the payment of dividends and $3.5 million for treasury share purchases.

The Company has $476.1 million of liabilities for future policy benefits and policy benefits and claims that it expects to ultimately pay out of current assets and cash flows from future business. If necessary, the Company could utilize the cash received from maturities and repayments of its fixed maturity investments if the timing of claim payments associated with the Company's insurance resources does not coincide with future cash flows. For the nine months ended September 30, 2016, cash received from the maturities and other repayments of fixed maturities was $35.5 million.

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.

BALANCE SHEET

The Company had receivables due from reinsurers of $478.8 million at September 30, 2016 compared to $483.1 million at December 31, 2015. All of such reinsurance receivables are from highly rated companies or are adequately secured. No allowance for doubtful accounts was necessary at September 30, 2016.

Cash and investments increased primarily as a result of the proceeds from the Risk Solutions Sale and Coinsurance Transaction.

The Company's liability for policy benefits and claims by segment are as follows (in thousands):


		Policy Benefits and Claims
		September 30,		December 31,
		2016		2015

Medical Stop-Loss	$	91,091	$	100,088
Specialty Health		50,037		41,477
Group Disability		95,626		97,986
Individual A&H and Other		6,065		5,892

	$	242,819	$	245,443

Major factors that affect the Projected Net Loss Ratio assumption in reserving for medical stop-loss relate to: (i) frequency and severity of claims; (ii) changes in medical trend resulting from the influences of underlying cost inflation, changes in utilization and demand for medical services, the impact of new medical technology and changes in medical treatment protocols; and (ii) the adherence to the Company's underwriting guidelines. Changes in these underlying factors are what determine the reasonably likely changes in the Projected Net Loss Ratio.

The primary assumption in the determination of specialty health reserves is that historical claim development patterns tend to be representative of future claim development patterns. Factors that may affect

this assumption include changes in claim payment processing times and procedures, changes in product design, changes in time delay in submission of claims, and the incidence of unusually large claims. 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 minimal. The time delay in submission of claims tends to be stable over time and not subject to significant volatility. 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 on the Company’s financial condition, results of operations, or liquidity.

The $115.6 million increase in IHC’s stockholders' equity in the first nine months of 2016 is primarily due to the $114.8 million of net income attributable to IHC and $6.8 million of other comprehensive income attributable to IHC, partially offset by $3.5 million of treasury stock purchases, a $2.2 million decrease related to the purchase of AMIC shares from noncontrolling interests and $0.8 million of common stock dividends. Noncontrolling interests in subsidiaries decreased primarily as a result of taking AMIC private in 2016.

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. Although the Company's gross unrealized losses on available-for-sale securities totaled $2.8 million at September 30, 2016, more than 99% of the Company’s fixed maturities were investment grade and continue to be rated on average AA. The Company marks all of its available-for-sale securities to fair value through accumulated other comprehensive income or loss. These investments tend to carry less default risk and, therefore, lower interest rates than other types of fixed maturity investments. At September 30, 2016, less than 1% of our fixed maturities were non-investment grade fixed maturities. The Company does not have any non-performing fixed maturities at September 30, 2016.

The Company reviews its investments regularly and monitors its investments continually for impairments. The Company recognized $1.5 million of other-than-temporary impairment losses on certain fixed maturities available-for-sale during the nine months ended September 30, 2016 due to credit losses. The Company determined that it is more likely than not that we will sell the securities before recovery of their amortized cost basis. During the nine months ended September 30, 2015, the Company recognized $0.2 million of other-than-temporary impairment losses on equity securities available-for-sale due to the length of time and extent an equity security was below cost. At September 30, 2016, there were no securities with fair values less than 80% of their amortized cost.

The unrealized losses on all available-for-sale securities have been evaluated in accordance with the Company's impairment policy and were determined to be temporary in nature at September 30, 2016. In 2016, the Company recorded $13.3 million of net unrealized gains on available-for sale securities, pre-tax, in other comprehensive income (loss) prior to reclassification adjustments. From time to time, as warranted, the Company may employ investment strategies to mitigate interest rate and other market exposures. Further deterioration in credit quality of the companies backing the securities, further deterioration in the condition of the financial services industry, a continuation of the current imbalances in liquidity that exist in the marketplace, a continuation or worsening of the current economic recession, or additional declines in real estate values may further affect the fair value of these securities and increase the potential that certain unrealized losses be designated as other-than-temporary in future periods and the Company may incur additional write-downs.

CAPITAL RESOURCES

Due to its strong capital ratios, broad licensing and excellent asset quality and credit-worthiness, the Insurance Group remains well positioned to increase or diversify its current activities. It is anticipated that future acquisitions or other expansion of operations will be funded internally from existing capital and

surplus and parent company liquidity. In the event additional funds are required, it is expected that they would be borrowed or raised in the public or private capital markets to the extent determined to be necessary or desirable.

IHC enters into a variety of contractual obligations with third parties in the ordinary course of its operations, including liabilities for insurance reserves, funds on deposit, debt and operating lease obligations. However, IHC does not believe that its cash flow requirements can be fully assessed based solely upon an analysis of these obligations. Future cash outflows, whether they are contractual obligations or not, also will vary based upon IHC’s future needs. Although some outflows are fixed, others depend on future events. The maturity distribution of the Company’s obligations, as of September 30, 2016, is not materially different from that reported in the schedule of such obligations at December 31, 2015 which was included in Item 7 of the Company’s Annual Report on Form 10-K. In October of 2016, the Company redeemed $22.7 million of its junior subordinated debt securities and has given notice that it will redeem the remaining junior subordinated debt securities in December 2016.

OUTLOOK

For the balance of 2016, the Company anticipates that it will:

Continue to experience a decrease in premiums and earnings due to exiting the medical stop-loss business as a result of the closing of the Risk Solutions Sale and Coinsurance Transaction.

Continue to show significant increases in specialty health premiums (including short-term and supplemental health products, such as dental, accident medical, gap and critical illness products), and continued decrease in major medical premiums, which is in run-off.

As a result of the acquisition of PetPlace.com, IHC’s ownership of HealtheDeals.com and AspiraAmas.com and its investment in HealthInsurance.org, we continue to increase IHC’s emphasis on lead generation for its direct-to-consumer and career advisor distribution initiatives, as well as experiencing the accompanying start-up costs of expanding our controlled sales through our call center, career model and transactional websites.

Expand sales of our specialty health products as a result of investments this year in two agencies and a worksite marketing company.

Most likely be positively impacted, in the aggregate, as a result of the recent adoption by certain departments of the federal government of a rule that, among other things, limits the duration of short-term medical (STM) products to less than three months. The Company believes that the rule could have the following impacts on its specialty health business: (i) increase sales of STM prior to the effective date of the change as consumers seek to purchase policies of longer than three months in duration; (ii) a shift in sales in 2017 from STM to our hospital indemnity products, which may benefit IHC overall; and (iii) a decrease in earned STM premiums beginning at the end of 2017 and for so long as the rule remains in effect.

Expect to experience a continuation of the increase in premiums from group long-term and short-term disability driven by higher retention amounts and a full year of premiums generated by a relatively new distribution partnership.

Continue to evaluate strategic transactions. Subsequent to September 30, 2016, the Company has redeemed the Junior Subordinated Debt Securities due in April 2033 and the Junior Subordinated Debt Securities due in January 2034 and has given notice that it will redeem the Junior Subordinated Debt Securities due in December 2034 prior to the end of the year. By December 31, 2016 we will have retired all of our debt, and have significant cash. We plan to continue to redeploy some of this cash in making investments and acquisitions to bolster existing or new lines of business.

Continue to focus on administrative efficiencies, including reducing operating losses at Ebix Health Exchange.

On March 31, 2016, IHC and its subsidiary Independence American Holdings Corp. sold the stock of Risk Solutions. In addition, under the purchase and sale agreement, all of the in-force stop-loss business of Standard Security Life and Independence American produced by Risk Solutions is co-insured by Westport as of January 1, 2016. The aggregate purchase price was $152.5 million in cash, subject to adjustments and settlements. This transaction resulted in a gain of $99.9 million, net of taxes and amounts attributable to noncontrolling interests. As a result, IHC is highly liquid and has excess capital; however its Medical Stop-Loss line of business is in run-off, which will have a negative impact on future earnings.

The Company will remain highly liquid in 2016 as a result of the continuing shorter duration of the portfolio. IHC has approximately $164.3 million in highly rated shorter maturity securities at September 30, 2016 earning on average 1.6%; our portfolio as a whole is rated, on average, AA. The low 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 the increased rate review scrutiny to effect timely rate changes and will need to stay focused on the management of medical cost drivers as medical trend levels cause margin pressures. Therefore, 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.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company manages interest rate risk by seeking to maintain an investment portfolio with a duration and average life that falls within the band of the duration and average life of the applicable liabilities. Options and other derivatives may be utilized 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. This is accomplished by first creating an insurance model of the Company's in-force policies using current assumptions on mortality, lapses and expenses. Then, current investments are assigned to specific insurance blocks in the model using appropriate prepayment schedules and future reinvestment patterns.

The results of the model specify whether the investments and their related cash flows can support the related current insurance cash flows. Additionally, various scenarios are developed changing interest rates and other related assumptions. These scenarios help evaluate the market risk due to changing interest rates in relation to the business of the Insurance Group.

The expected change in fair value as a percentage of the Company's fixed income portfolio at September 30, 2016 given a 100 to 200 basis point rise or decline in interest rates is not materially different than the expected change at December 31, 2015 included in Item 7A of the Company’s Annual Report on Form 10-K.

In the Company's analysis of the asset-liability model, a 100 to 200 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 were acquired 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 unrealized gains in its investment 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.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and procedures

IHC’s Chief Executive Officer and Chief Financial Officer supervised and participated in IHC’s evaluation of its disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in IHC’s periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

As previously disclosed in Item 9A of our Form 10-K for the year ended December 31, 2015, management concluded that there were material weaknesses in internal control over financial reporting for income taxes. Management determined that we did not maintain effective controls over the accounting for and disclosures of technical accounting matters as they relate to income taxes. Specifically, we did not have (i) sufficient tax accounting resources with adequate knowledge of the Company’s process and controls over financial reporting related to income taxes to effectively design, operate, and document controls over accounting for income taxes, (ii) an adequate risk assessment process related to income tax accounting to identify and appropriately account for income taxes associated with significant, non-routine transactions and (iii) effective process level controls over completeness, existence, accuracy and disclosure of deferred tax balances.

Plan for Remediation of Material Weaknesses

The Company is actively engaged in evaluating and determining implementation steps to remediate the material weaknesses in internal control over financial reporting identified related to accounting for income taxes. The Company has begun and will continue to (i) augment existing tax staff with additional skilled tax accounting resources and providing additional training to existing staff on the design and operation of tax related financial reporting and corresponding internal controls, (ii) enhance risk assessment processes that operate over accounting for income taxes, with a particular focus on the tax accounting and disclosure for unusual and complex transactions, and (iii) review the processes and controls in place to measure and record transactions related to tax accounting to enhance the effectiveness of the design and operation of those controls. Though the Company has begun to address the remediation efforts described above, until the remediation actions are fully implemented and the operational effectiveness of related internal controls validated through testing, the material weaknesses described above will continue to exist.

Changes in Internal Control Over Financial Reporting

There has been no change in IHC’s internal control over financial reporting during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, IHC's internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are involved in legal proceedings and claims that arise in the ordinary course of our businesses. We have established reserves that we believe are sufficient given information presently available related to our outstanding legal proceedings and claims. We do not anticipate that the result of any pending legal proceeding or claim will have a material adverse effect on our financial condition or cash flows, although there could be such an effect on our results of operations for any particular period.

ITEM 1A.

RISK FACTORS

There were no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 in Item 1A to Part 1 of Form 10-K.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Share Repurchase Program

IHC has a program, initiated in 1991, under which it repurchases shares of its common stock. In August 2016, the Board of Directors increased the number of shares that can be repurchased to 3,000,000 shares of IHC common stock. As of September 30, 2016, 2,895,442 shares were still authorized to be repurchased.

Share repurchases during the third quarter of 2016 are summarized as follows:


2016
						Maximum Number
				Average Price		Of Shares Which
	Month of	Shares		of Repurchased		Can be
	Repurchase		Repurchased		Shares		Repurchased

	July	-		$	-	214,911
	August	96,558		$	16.45	2,903,442
	September		8,000	$	17.66	2,895,442

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

In November 2016, certain executives of IHC’s subsidiary, IHC Specialty Benefits, Inc. (“Specialty Benefits”) who are key contributors to the success of Specialty Benefits, were granted incentive sale bonuses. The bonuses are intended to induce such executives to continue to provide services to Specialty Benefits, and incentivize them to enhance Specialty Benefits’ value and assure the present and future dedication to maximizing value in the event one of the following transactions involving one or more of Specialty Benefits, its parent IHC SB Holdings ("Holdings"), and its affiliate IHC Carrier Solutions ("Carrier Solutions") occur: (i) sale of more than 50% of the equity, (ii) a merger, (iii) of a sale of all or substantially all of the assets, and (iv) any other transaction the intent of which may reasonably and equitably be construed to effect a result substantially equivalent to the foregoing (any of the foregoing, a "Sale"). The only

Specialty Benefits executive receiving a grant is David T. Kettig, Chief Operating Officer and Executive Vice President of IHC, and Chief Executive Officer and President of Specialty Benefits. IHC’s Compensation Committee ratified the grant to Mr. Kettig of an incentive bonus equal to 1.5% of the net sale price pursuant to a Sale Bonus Agreement, dated November 7, 2016, by and between Independence American Holdings Corp. (“IAHC”), a subsidiary of IHC and indirect parent of Specialty Benefits, and Mr. Kettig, attached to this Form 10-Q as Exhibit 10.8 (the “Sale Bonus Agreement”). The bonus will be paid in a lump sum within 120 days after the consummation of the Sale, and is payable only if Mr. Kettig is still employed by Specialty Benefits. The Sale Bonus Agreement terminates on the earlier of (i) the termination of Mr. Kettig by Specialty Benefits or the last date of employment with Specialty Benefits or Carrier Solutions, or (ii) the five-year anniversary the Sale Bonus Agreement; provided, however, that such term shall be automatically extended for successive two (2) year periods unless IAHC shall, at least thirty (30) days prior to the expiration of the then-applicable term, have given written notice to Mr. Kettig that the term of the Sale Bonus Agreement shall not be so extended, in which case no such extension shall occur.

ITEM 6.

EXHIBITS

3.1

Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3(i) to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and incorporated herein by reference).

3.2

Certificate of Amendment of Restated Certificate of Incorporation of Independence Holding Company (Filed as Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on July 29, 2004 and incorporated herein by reference).

3.3

By-Laws of Independence Holding Company (Filed as Exhibit 3.3 to our Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference), as amended by Amendment to By-Laws of Independence Holding Company (Filed as Exhibit 3.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 and incorporated herein by reference).

10.1

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Standard Security Life Insurance Company of New York and Mr. David T. Kettig (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.2

Officer Employment Agreement, made as of April 18, 2011, by and among Independence Holding Company, Madison National Life Insurance Company, Inc. and Mr. Larry R. Graber (Filed as Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.3

Officer Employment Agreement, made as of April 18, 2011, by and between Independence Holding Company and Ms. Teresa A. Herbert (Filed as Exhibit 10.5 to our Current Report on Form 8-K filed with the SEC on April 22, 2011 and incorporated herein by reference).

10.4

Officer Employment Agreement, made as of May 11, 2011, by and between Independence Holding Company and Mr. Roy T.K. Thung (Filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2011 that was filed with the SEC on May 12, 2011, and incorporated herein by reference).

10.5

Officer Employment Agreement, by and among Independence Holding Company, IHC Risk Solutions, LLC and Mr. Michael A. Kemp, dated as of May 22, 2012 (Filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 29, 2012, and incorporated herein by reference).

10.6

Retirement Benefit Agreement, dated as of September 30, 1991, between Independence Holding Company and Mr. Roy T.K. Thung, as amended. (Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference; Amendment No. 1 filed as Exhibit 10(iii)(A)(4a) to our Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference; Amendment No. 2 filed as Exhibit 10(iii)(4)(b) to our Current Report on Form 8-K filed with the SEC on June 22, 2005 and incorporated herein by reference; Amendment No. 3 filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on January 7, 2009 and incorporated herein by reference.)

10.7

Purchase Agreement, made and entered into on June 15, 2015, by and among Madison National Life Insurance Company, Inc., Standard Security Life Insurance Company of New York and National Guardian Life Insurance Company (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on June 16, 2015, and incorporated herein by reference).

10.8

Sale Bonus Agreement, dated November 7, 2016, by and between Independence American Holdings Corp. and David T. Kettig. *

31.1

Certification of the Chief Executive Officer and President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

32.2

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS

XBRL Instance Document. *

101.SCH

XBRL Taxonomy Extension Schema Document. *

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document. *

101.LAB

XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document. *

* Filed herewith.

SIGNATURES

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

(REGISTRANT)

By:

/s/Roy T. K. Thung

Date:

November 9, 2016

Roy T.K. Thung

Chief Executive Officer, President

and Chairman

By:

/s/Teresa A. Herbert

Date:

November 9, 2016

Teresa A. Herbert

Senior Vice President and

Chief Financial Officer

Exhibit 10.8

SALE BONUS AGREEMENT

THIS SALE BONUS AGREEMENT (this “ Agreement ”) is dated as of November 7, 2016 by and between Independence American Holdings Corp., a Delaware corporation (“ IAHC ”), and the undersigned executive (the “ Executive ”).

BACKGROUND

IAHC is the sole parent of IHC SB Holdings, LLC, a Delaware limited liability company (“Holdings”), and sole indirect parent of Holdings’ subsidiary, IHC Specialty Benefits, Inc., a Delaware corporation (the “ Company ”).

IAHC, Holdings and the Company are all affiliated with IHC Carrier Solutions, Inc., a Delaware corporation (the “ CS ”), which provides certain actuarial, compliance, program management and administrative services in connection with some business sold by the Company.

IAHC desires to induce the Executive, as a key contributor to the success of the Company, to continue to provide services to the Company, enhance the Company’s value, and assure the present and future continuity, objectivity and dedication of management in the event of any Sale (as defined herein) of the Company to maximize the value of the Company upon a Sale, by offering to pay, in accordance with the terms and conditions set forth herein, an incentive bonus in the event of a (i) Sale of the Company, (ii) Sale of Holdings, (iii) Sale of the Company and CS, (iv) Sale of Holdings and CS.

AGREEMENT

The parties hereto, in consideration of the foregoing and the mutual covenants contained herein, along with other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, hereby agree as follows:

Incorporation of Recitals . The above Recitals are hereby incorporated by reference as if set forth hereinafter.

Sale Bonus . Subject to the terms and conditions set forth in this Agreement, the Company will pay to the Executive a cash bonus (the “ Sale Bonus ”) upon a Sale of Holdings, the Company, the Company and CS, or Holdings and CS in an amount determined in accordance with Schedule A hereto, which shall be deemed a part of this Agreement.

Time of Payment . The Sale Bonus, less required withholding, will be paid to the Executive in a lump sum within 120 days of the date the Sale is consummated (the “ Payment Date ”).

Definition of Sale . For purposes of this Agreement, a “ Sale ” is defined as any one of the following transactions:

(a)

A sale or other disposition of equity securities representing more than 50% of the then-outstanding voting securities entitled to vote in the election of directors to any Person (as defined herein) that is then not an Affiliate (as defined herein) of the selling party;

(b)

A merger, consolidation, reorganization or amalgamation;

(c)

The direct or indirect sale, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all of the properties or assets to any Person that is not an Affiliate of the selling party ; or

(d)

Any other transaction the intent of which may reasonably and equitably be construed to effect a result substantially equivalent to that described in paragraphs (a), (b) or (c) above, as determined in the sole and absolute discretion of the Board of Directors of IAHC (the “IAHC Board”).

For purposes of this Agreement, “ Affiliate ” means, with respect to any Person, any other Person controlling, controlled by or under common control with such Person, where “control” is defined as the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. “ Person ” means any individual, corporation, partnership, firm, joint venture, association, limited liability company, limited liability partnership, joint-stock company, trust, unincorporated organization, governmental, judicial or regulatory body, business unit, division or other entity.

Conditions Precedent . The payment of the Sale Bonus is conditioned upon the Executive’s continued employment with the Company through the Payment Date. In addition, the Executive’s right to receive and retain the Sale Bonus is expressly conditioned on the Executive’s continued compliance in full with the Executive’s obligations under any agreement between the Executive and the Company or any Affiliate of the Company (including, without limitation, any employment agreement) and with all policies, programs and codes of conduct of the Company or any Affiliate of the Company applicable to the Executive.

Withholding . The Company shall have the right to withhold from any Sale Bonus, any federal, state or local income and/or payroll taxes required by law to be withheld and to take such other action as the Company may deem advisable to enable the Company and the Executive to satisfy obligations for the payment of withholding taxes and other tax obligations relating to the Sale Bonus.

409A . It is intended that all payments hereunder shall comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and the regulations promulgated thereunder so as not to subject the Executive to payment of interest or any additional tax under Section 409A. All terms of this Agreement which are undefined or ambiguous must be interpreted in a manner that is consistent with Section 409A if necessary to comply with Section 409A. This Agreement will be construed and administered to preserve the exemption from Section 409A of payments that qualify as short-term deferrals pursuant to Treas. Reg. § 1.409A-1(b)(4). In furtherance thereof, if payment or provision of any amount or benefit hereunder that is subject to Section 409A at the time specified herein would subject such amount or benefit to any additional tax under Section 409A, the payment or provision of such amount or benefit will be postponed to the earliest commencement date on which the payment or provision of such amount or benefit could be made without incurring such additional tax. In addition, to the extent that any regulations or other guidance issued under Section 409A (after application of the previous provisions of this Section) would result in the Executive’s being subject to the payment of interest or any additional tax under Section 409A of the Code, the parties hereto agree, to the extent reasonably possible, to amend this Agreement in order to avoid the imposition of any such interest or additional tax under Section 409A, which amendment shall have the minimum economic effect necessary

and be reasonably determined in good faith by IAHC and the Executive. The right to a series of payments will be treated as a right to a series of separate payments. Executive acknowledges and agrees that none of IAHC, the Company or its other Affiliates has made any representation to Executive as to the tax treatment of the compensation provided pursuant to this Agreement and that Executive is solely responsible for all taxes due with respect to such compensation.

Section 280G .

8.1.

Reduction . Notwithstanding any other provision of this Agreement or any plan, arrangement or agreement between the Executive and the Company or its Affiliates to the contrary, if any of the payments or benefits provided or to be provided by the Company or its Affiliates to the Executive (including, without limitation, payments under the Executive’s employment agreement with Independence Holding Company, as applicable) or for the Executive’s benefit pursuant to the terms of this Agreement or otherwise (“ Covered Payments ”) constitute parachute payments (“ Parachute Payments ”) within the meaning of Section 280G of the Code and would, but for this Section 8, be subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or any similar tax imposed by state or local law or any interest or penalties with respect to such taxes (collectively, the “ Excise Tax ”), then the Covered Payments shall be reduced to the minimum extent necessary to ensure that no portion of the Covered Payments is subject to the Excise Tax (such amount, the “ Reduced Amount ”). Any such reduction in Covered Payments will be made by reducing the amount of the Sale Bonus.

8.2.

Determinations . Any determination required under this Section 8, including whether any payments or benefits are Parachute Payments, shall be made by the IAHC Board in its sole and absolute discretion. The Executive shall provide the IAHC Board with such information and documents as the IAHC Board may reasonably request in order to make a determination under this Section 8. The IAHC Board's determination shall be final and binding on the Executive.

Termination . The term of this Agreement shall commence on the date hereof and end on the earlier of (i) the termination of the Executive by IHC or the last date of employment with IHC or (ii) the five-year anniversary thereof; provided, however , that such term shall be automatically extended for successive two (2) year periods unless IAHC shall, at least thirty (30) days prior to the expiration of the then-applicable term, have given written notice to the Executive that the term of the Agreement shall not be so extended, in which case no such extension shall occur.

10.

Assignment; Third Party Beneficiaries . Neither IAHC nor the Executive may make any assignment of this Agreement, by operation of law or otherwise, without the prior written consent of the other. This Agreement shall inure to the benefit of and be binding upon IAHC and the Executive, and their respective successors, executors, administrators, heirs and permitted assigns. This Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns, except for the Company, Holdings and CS, which shall be third party beneficiaries of this Agreement.

11.

Waiver . No waiver of any provision of this Agreement shall be effective unless made in writing and signed by the waiving party. The failure of either party hereto to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of or non-performance under this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach or non-performance.

12.

Entire Agreement . This Agreement constitutes the entire agreement between the parties hereto and supersedes and terminates all prior communications, agreements and understandings, written or oral, with respect to the transactions contemplated herein, including, without limitation, the terms and conditions of the Sale Bonus.

13.

Notice . All written communications to a party under this Agreement shall be in writing and (a) delivered in person (to be effective when so delivered), (b) mailed by registered or certified mail, return receipt requested (to be effective four days after the date it is deposited in the U.S. Mail), (c) deposited with a nationally recognized overnight courier service (to be effective two business days after the delivery to such courier service), or (d) sent by email transmission (to be effective upon receipt by the sender of electronic confirmation of delivery of the email), with confirmation sent by way of one of the above methods, to the party at the address given below for such party (or to such other address as such party shall designate in a writing complying with this Section 13, delivered to the other party):

If to IAHC:

c/o The IHC Group

485 Madison Avenue, 14 ^th Floor

New York, NY 10022

Attn:

Loan Nisser

Telephone:

(212) 355-4141

Email:

lnisser@sslicny.com

If to the Executive:

To the address then currently on file with the Company.

14.

Headings . The headings and captions in this Agreement are for convenience only and do not define or describe the scope or content of any provision of this Agreement.

15.

Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument.

16.

Miscellaneous . This Agreement (a) may not be amended, modified or terminated orally or by any course of conduct pursued by IAHC or the Executive, but may be amended, modified or terminated only by a written agreement duly executed by IAHC and the Executive, and (b) shall be governed by, and interpreted and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of law.

[Signature page follows]

IN WITNESS WHEREOF, this Agreement has been executed by Independence American Holdings Corp., by its duly authorized representative, and by the Executive, as of the date first above written.


EXECUTIVE		INDEPENDENCE AMERICAN HOLDINGS CORP.
/s/ David T. Kettig_____________		By: /s/ Teresa A. Herbert_____________
Name: David T. Kettig		Name: Teresa A. Herbert
		Title: VP - Finance

ACKNOWLEDGED AND AGREED :

IHC Specialty Benefits, Inc.

By: /s/ Loan Nisser_____________

Name: Loan Nisser

Title: Secretary

IHC SB Holdings, LLC

By: /s/ Gary J. Balzofiore_____________

Name: Gary J. Balzofiore

Title: VP - Finance

IHC Carrier Solutions, Inc.

By: /s/ Jan Dubauskas_____________

Name: Jan Dubauskas

Title: Chief Legal Officer

Schedule A

Sale Bonus Calculation

The amount of the Executive ’ s Sale Bonus will be the product of (x) and (y), where (x) is the “ Net Sale Price ” and (y) is 1.5%.

For purposes of this calculation:

“ Net Sale Price ” means:

In the event of a Sale of the Company or Holdings only:

Net Sale Price = A − B − C − D

Where:

A = the proceeds on sale of the Company or Holdings, as the case may be, in the transaction constituting the Sale

B = the transaction expenses (including this Sale Bonus) incurred by the Company or Holdings, as the case may be, in connection with the Sale

C = the Book Value (defined below) of the Company or Holdings, as the case may be

D = taxes on the transaction determined using the Applicable Tax Rate (defined below)

“Book Value of the Company or Holdings” means $55,000,000 in the event of the Sale of only the Company or Holdings, subject to upward or downward adjustment, as appropriate, for any (i) acquisitions of either assets or equity by the Company or Holdings, as the case may be, (ii) merger with another Person where the Company or Holdings, as the case may be, is the surviving entity or (iii) sale or divestiture of equity or assets of the Company or Holdings, as the case may be, each made after September 30, 2016 that impact the book value of the Company or Holdings, as the case may be, with any such adjustment made by the IAHC Board in the good faith exercise of its reasonable discretion.

II.

In the event that CS is also sold to the purchaser of the Company or Holdings, as the case may be, or an Affiliate of such purchaser:

Net Sale Price = E − F − G − H

Where:

E = the proceeds on sale of the Company or Holdings, as the case may be, and CS in the transaction constituting the Sale

F = the aggregate transaction expenses (including this Sale Bonus) incurred by the Company or Holdings, as the case may be, and CS in connection with the Sale

G = the aggregate Book Value of the Company or Holdings, as the case may be, and CS (defined below)

H = taxes on the transaction determined using the Applicable Tax Rate

“Book Value of the Company or Holdings, as the case may be, and CS” means $60,000,000 in the event of the Sale of the Company or Holdings, as the case may be, and CS, subject to upward or downward adjustment, as appropriate, for (i) acquisitions of either assets or equity by the Company or Holdings, as the case may be, and/or CS (ii) merger with another Person where the Company or Holdings, as the case may be, or CS is the surviving entity or (iii) sale or divestiture of equity or assets of the Company or Holdings, as the case may be, and/or CS, each made after September 30, 2016 that impact the book value of the Company or Holdings, as the case may be, and CS with any such adjustment made by the IAHC Board in the good faith exercise of its reasonable discretion

“Applicable Tax Rate” shall mean the federal and state tax rate payable by the seller, as the case may be, that is in effect as of the date that the Sale is consummated, but not less than 22.5% in each case unless otherwise determined by the IAHC Board in the good faith exercise of its reasonable discretion.

The IAHC Board shall calculate the Sale Bonus in good faith in compliance with the terms of this Agreement and in a manner designed to give effect to the purposes and intent of the parties hereto.

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND PRESIDENT PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Roy T. K. Thung certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Independence Holding Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2016

/s/ Roy T.K. Thung _________________

Roy T. K. Thung

Chief Executive Officer, President and Chairman

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Teresa A. Herbert, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Independence Holding Company;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 9, 2016

/s/ Teresa A. Herbert ______________________

Teresa A Herbert

Senior Vice President and Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Independence Holding Company (the "Company") on Form 10-Q for the quarter ended September 30, 2016, as filed with the Securities and Exchange Commission (the "SEC") on the date hereof (the "Report"), I, Roy T. K. Thung, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2016

/s/ Roy T.K. Thung *

Roy T. K. Thung

Chief Executive Officer, President and Chairman

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

EXHIBIT 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Independence Holding Company (the "Company") on Form 10-Q for the quarter ended September 30, 2015, as filed with the Securities and Exchange Commission (the "SEC") on the date hereof (the "Report"), I, Teresa A. Herbert, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

November 9, 2016

/s/ Teresa A. Herbert*

Teresa A. Herbert

Senior Vice President and Chief Financial Officer

* A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.