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 underwriting, administering and/or distributing group and individual specialty benefit products, including disability, supplemental health, pet, and group life insurance 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"), and Independence American Insurance Company; and (ii) its marketing and administrative companies, including IHC Specialty Benefits Inc. (“IHCSB”), IHC Brokerage Group, Inc. (“IBG”), INSXCloud, Inc. (“INSXCloud”) (formerly My1HR, Inc.), collectively the “IHC Agencies” and its lead generation company, Torchlight Technology Group LLC., (“Torchlight”). On June 30, 2021, the Company sold its majority interest in PetPartners, Inc. (“PetPartners”), a major distributor and administrator of pet insurance underwritten by Independence American Insurance Company and an unaffiliated insurer. Standard Security Life, Madison National Life and Independence American Insurance Company 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 Holdings, Inc., a financial holding company, through its wholly-owned subsidiaries (collectively “Geneve”), held approximately 62% of IHC's outstanding common stock as of September 30, 2021. In August 2021, IHC’s Board of Directors received a preliminary, non-binding proposal from Geneve to acquire all of the outstanding shares of common stock of IHC that are not already beneficially owned by Geneve in a going-private transaction (“Going Private Transaction”).  Geneve’s proposed purchase price at that time was $50 per share, payable in cash. The Board of Directors formed a Special Committee of independent and disinterested directors to consider the proposal and to review, evaluate, negotiate and recommend the approval or disapproval of the proposal and consider alternatives. On November 9, 2021, the Special Committee concluded unanimously that a Going Private Transaction with a purchase price of $57 per share on the terms negotiated was fair and in the best interests of IHC’s stockholders other than Geneve. Upon its approval by the Board of Directors, IHC, Geneve Holdings, Inc. and Geneve Acquisition Corp., a wholly owned subsidiary of Geneve Holdings, Inc., entered into a merger agreement (“Merger Agreement”) pursuant to which holders of IHC’s outstanding shares of common stock, excluding shares held by Geneve, will receive $57 per share in cash. The consummation of the Going Private Transaction is subject to certain closing conditions, including approval by the holders of a majority of IHC’s outstanding shares of common stock that are not held by Geneve and its affiliates and the consummation of the pending sales of IHC’s subsidiaries, Independence American Holdings Corp. and Standard Security Life discussed in Note 2. Further information regarding the terms and conditions in the Merger Agreement is contained in the Current Report on Form 8-K filed by IHC with the SEC on November 9, 2021. 

(B)     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 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

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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.

During the second and third quarters of 2021, the Board of Directors committed to various plans for the disposal of several business operations (see Note 2). Each plan represents a strategic shift that will have a major effect on the Company’s operations and financial results and as such, they each qualify for reporting as discontinued operations in 2021. The assets, liabilities, and related income and expenses associated with each disposal group are presented as discontinued operations in the accompanying condensed consolidated financial statements and Notes thereto for all periods presented.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global health pandemic and the United States declared a national health emergency. COVID-19 has led to largescale disruption in the global economy, market instability and widespread unemployment in the United States. The COVID-19 outbreak continues to be a fluid situation and as it evolves, the duration of COVID-19 and its potential effects on our business cannot be certain. Regulatory mandates have affected, and we anticipate will continue to impact, the insurance industry. We currently cannot predict if there will be a material impact to our business, results of operations or financial condition in future reporting periods. Consequently, future changes in market conditions may impact estimates used in the preparation of our financial statements associated with evaluations of goodwill and other intangible assets for impairment, estimates associated with the determination of valuation allowances related to net operating loss carryforwards, and estimates of certain losses under insurance contracts. These estimates may all be subject to substantial adjustments in future periods.  In addition, volatile market conditions may result in declines in the fair value of our investment portfolio and possible impairments of certain securities.

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, 2021 are not necessarily indicative of the results to be anticipated for the entire year.

(C)  Reclassifications 

Certain amounts in prior year’s condensed consolidated financial statements and Notes thereto have been reclassified to conform to the 2021 presentation, primarily for the effects of discontinued operations.

(D)   Recent Accounting Pronouncements 

Recently Adopted Accounting Standards

In December 2019, the Financial Accounting Standard Board (“FASB”) issued guidance to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes, the requirement to allocate current and deferred tax expense to legal entities not subject to tax in its separate financial statements, enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. 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 2021, the FASB issued guidance to improve comparability after a business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired

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in a business combination. The guidance requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in the same manner that they were recognized and measured in the acquiree’s financial statements before the acquisition. For public companies, the amendments in this guidance are effective for fiscal years beginning after December 15, 2022, and for interim periods within those fiscal years, with early implementation permitted, and should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The amendments in this guidance is not expected to have a material effect on the Company’s consolidated financial statements.

In August 2018, the FASB issued guidance to improve existing measurements, presentation and disclosure requirements for long-duration contracts issued by insurance entities. The amendments in this guidance requires an entity to (1) review and update assumptions used to measure cash flows at least annually as well as update the discount rate assumption at each reporting date; (2) measure market risk benefits associated with deposit contracts at fair value; (3) disclose liability rollforwards and information about significant inputs, judgements assumptions, and methods used in measurement. Additionally, it simplifies the amortization of deferred acquisition costs and other balances on a constant level basis over the expected term of the related contracts. In 2019, the FASB delayed the original effective dates. For smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Upon adoption, the amendments in this guidance should be applied to contracts in-force as of the beginning of the earliest period presented with a cumulative adjustment to beginning retained earnings. Management is evaluating the requirements and potential impact that the adoption of this guidance will have 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 the currently applied U.S. GAAP method of taking a permanent impairment of the security, 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. In 2019, the FASB provided transition relief by providing entities with an option to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments upon adoption and delayed the original effective dates. For smaller reporting companies, the amendments in this guidance are now effective for fiscal years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted. The amendments in this guidance 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 is evaluating the requirements and potential impact that the adoption of this guidance will have on the Company’s consolidated financial statements.

Note 2.Discontinued Operations 

(A)Sale of Standard Security Life 

On April 14, 2021, IHC and its wholly owned subsidiary, Independence Capital Corp. (“ICC”), entered into a Stock Purchase Agreement with Reliance Standard Life Insurance Company (“Reliance Standard”) to sell all of the issued and outstanding capital stock of Standard Security Life, a wholly owned subsidiary of ICC, for an aggregate purchase price of $180,000,000 in cash.  On July 29, 2021, the stock purchase agreement was amended and restated (the “SSL Amended Purchase Agreement”). In accordance with the SSL Amended Purchase Agreement, the Company will receive the excess of aggregate statutory capital and surplus, calculated as of the closing date, over $57,000,000. The closing of the transaction, the closing distribution and certain other items are subject to customary closing conditions including applicable regulatory approvals, one of which is the approval of the New York State Department of Financial Services (”NYSDFS”). Standard Security Life focuses on underwriting and selling its New York short-term disability (“DBL”) and paid family leave rider (“PFL”) products and ceded a portion of this business to Independence American Insurance

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Company. We filed notice and received approval to cancel this reinsurance contract in accordance with the terms of the SSL Amended Purchase Agreement effective June 30, 2021. Under the terms of the SSL Amended Purchase Agreement, the sale transaction will include all of Standard Security Life’s DBL and PFL business (including the DBL and PFL business previously ceded to Independence American Insurance Company) in addition to all its other lines of business. The DBL and PFL business being sold was part of the Company’s Group disability, life, DBL and PFL segment. The aforementioned transaction, consisting of the sale of Standard Security Life, the closing distribution and other closing conditions, is collectively referred to as the “SSL Sale” transaction or disposal group. DBL and PFL are major product lines for the Company. The sale of Standard Security Life and resulting exit from DBL and PFL business represents a strategic shift that will have a major effect on the Company’s operations and financial results. The SSL Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 upon the Board of Director’s commitment to a plan for its disposal in April 2021. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the SSL Sale transaction by the end of 2021.

Aside from customary transition services, there will be no continuing involvement with Standard Security Life after its disposal.

(B)Sale of Pet Division and Independence American Insurance Company (“Pets Sale”) 

On May 17, 2021, IHC and certain subsidiaries entered into agreements to sell a 70% controlling interest in its pet division, including all of the issued and outstanding capital stock of Independence American Insurance Company to a subsidiary of Iguana Capital, Inc. (“Iguana Capital”), an investment company specifically formed to facilitate this transaction as follows:  

(i)IHC and its wholly owned subsidiary, IHC SB Holdings LLC (“SBH”), entered into a Stock Purchase Agreement (the “PPI Purchase Agreement”) with Iguana Capital to sell its 85% interest in PetPartners for $77,000,000 in cash (subject to working capital adjustments);  

(ii)IHC and its wholly owned subsidiary, AMIC Holdings, Inc. (“AMIC”), entered into a Stock Purchase Agreement (the “IAHC Purchase Agreement”) with Iguana Capital to sell all of the stock of Independence American Holdings Corp. (“IAHC”), which owns all of the stock of Independence American Insurance Company and other pet assets, for $190,400,000 in cash (subject to adjustments for targeted statutory capital and surplus): and  

(iii)Following each of the above, IHC will retain a 30% interest in the business sold in the form of an equity investment in Iguana Capital. IHC’s equity interest in Iguana Capital will become diluted in the future as a result additional investments made by Iguana Capital unless IHC invests its pro rata share. 

Both agreements are subject to customary closing conditions. The closing of the IAHC Purchase Agreement however is also subject to certain regulatory approvals, one of which is the approval of the Delaware Insurance Department.  For this reason, the transaction was structured as two agreements such that the sale of PetPartners occurred on June 30, 2021, and the closing of the transactions contemplated in the IAHC Purchase Agreement will follow at a later date upon receipt of applicable regulatory approvals. Provided that all regulatory approvals and other closing conditions are met, the Company expects to complete the IAHC sale transaction by the end of 2021.

Under the terms of the IAHC Purchase Agreement, the transaction includes the sale of all Independence American Insurance Company’s pet business and excludes other business lines. These excluded business lines will be reinsured by Madison National Life prior to closing. The reinsurance agreement will remain in effect until the underlying business runs out. The aforementioned transaction, consisting of the sale of PetPartners, IAHC and Independence American Insurance Company, and other closing conditions, is collectively referred to as the “Pets Sale” transaction or disposal group. The pet business being sold was part of the Company’s Specialty Health segment. Because the pet business is a major product line for the Company, and the Company will no longer actively engage in the sales and marketing of pet insurance, the Pets Sale

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transaction represents a strategic shift that will have a major effect on the Company’s operations and financial results. The Pets Sale transaction qualified for reporting as discontinued operations in the second quarter of 2021 as a result of the Board of Directors’ commitment to a plan for the disposal of a controlling interest in its pet business in May 2021, and the execution of both the PPI Purchase Agreement and the IAHC Purchase Agreement on May 17, 2021.

On June 30, 2021, the Company completed the sale of its majority interest in PetPartners and, as a result, the Company ceased to have a controlling financial interest in PetPartners. Upon closing, the Company received proceeds of $78,263,000 (consisting of the purchase price and certain initial working capital adjustments), recognized an initial equity investment in Iguana Capital valued at $33,762,000, and recorded a $62,229,000 gain on the disposal, net of transaction costs and income taxes for the nine months ended September 30, 2021. Transaction costs consisting of transaction bonuses, legal expenses and financial advisor expenses amounted to an aggregate of $6,079,000. The PPI Purchase Agreement includes a waiver and consent to offer The American Kennel Club (“AKC”), PetPartners’ minority shareholder, until December 31, 2021, the right to sell their shares at the same price and terms as in the PPI Purchase Agreement. In the event AKC desires to sell such its shares, Iguana Capital and SBH will equally finance the cash payment to AKC. In connection with the PPI Sale transaction, the Company recorded a $6,800,000 contingent liability (the maximum amount required) based on its belief that AKC will exercise this right. If for any reason the IAHC Purchase Agreement is terminated, then at the option of either SBH or an affiliate of Iguana Capital, IAHC may reacquire the Company’s interest in PetPartners (the “PPI Put/Call Option”). The value of the PPI Put/Call Option was deemed to be negligible due to the structure of the put and call features, the short time horizon and the Company’s belief that there is a low probability that the deal would be terminated. The proceeds received from the sale of PetPartners were deposited into an escrow account owned by SBH and treated as a security deposit. The funds will be released from escrow upon either the consummation of the IAHC sale transaction or upon the exercise of the PPI Put/Call Option. At September 30, 2021, the security deposit is presented as funds held in escrow on the Condensed Consolidated Balance Sheet.

Continuing involvement with the Pets Sale disposal group will consist of customary transition services, the PPI Put/Call Option and the equity investment in Iguana Capital. At September 30, 2021, the carrying value of the Company’s 30% equity interest in Iguana Capital is $33,475,000. The investment is accounted for using the equity method of accounting, and for the three months and nine months ended September 30, 2021, the Company recorded an equity loss of $(287,000) on its investment in Iguana Capital. In the fourth quarter of 2021, the Company committed to invest an additional $3,200,000 to Iguana Capital, but as a result of the magnitude of other investments being made by Iguana Capital, the Company expects its equity interest in Iguana Capital will be diluted.

(C)Sale of Madison National Life 

On July 14, 2021, IHC and its wholly owned subsidiary ICC entered into a stock purchase agreement (the “MNL Purchase Agreement”) with Horace Mann Educators Corporation to sell all of the issued and outstanding capital stock of Madison National Life, which is wholly owned by ICC, for an aggregate purchase price of $172,500,000 in cash; in addition, if Madison National Life reaches specified financial targets in 2023, IHC will receive an additional purchase price of up to $12,500,000. In accordance with the MNL Stock Purchase agreement and prior to closing, Madison National Life will enter into a reinsurance agreement with Independence American Insurance Company to reinsure all of Independence American Insurance Company’s non-pet business, primarily specialty health products, that are excluded from the Pets Sale transaction discussed above. The transaction has been approved by the Board of Directors of IHC, and IHC’s majority stockholders have entered into a voting agreement under which such majority stockholders agreed to approve the transaction. IHC’s majority stockholders approved the transaction by written consent on October 18, 2021. The closing is expected no earlier than January 1, 2022; and the transaction is subject to customary closing conditions, including applicable regulatory approvals, one of which is the approval by the Wisconsin Office of the Commissioner of Insurance. The aforementioned transaction, which includes the reinsured specialty health business of Independence American Insurance Company, is referred to as the “MNL Sale” transaction or disposal group and qualifies for reporting as discontinued operations in the third quarter of 2021 upon the

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Board of Director’s commitment to the disposal plan in July 2021.

In addition to customary transition services, there will be some continuing involvement with Madison National Life after its disposal with regards to the runout of the reinsured specialty health lines of business.

The following is a reconciliation, by disposal group, of the carrying amounts of major classes of assets and liabilities included in discontinued operations on the Condensed Consolidated Balance Sheets for the periods indicated (in thousands):