A.M. Best Affirms Ratings of Independence Holding Company and Its Subsidiaries

A.M. Best has affirmed the financial strength rating of A- (Excellent) and the issuer credit ratings (ICR) of “a-” of Madison National Life Insurance Company, Inc. (Madison National) (Madison, WI), Standard Security Life Insurance Company of New York (Standard Security) (New York, NY) and Independence American Insurance Company (Independence American) (New Castle, DE), all subsidiaries of Independence Holding Company (Independence Holding) (headquartered in Stamford, CT) [NYSE:IHC]. Concurrently, A.M. Best has affirmed the ICR of “bbb-” of Independence Holding. The outlook for all ratings is stable.

The ratings reflect Independence Holding and its insurance operating companies’ consistent positive operating results, focus on profitable segments for premium growth and its more than adequate combined risk-adjusted capitalization. Independence Holding’s insurance subsidiaries, facilitated by strong relationships with various partners, continue to generate consistently profitable operating earnings across its many lines of business. Earnings are supported by enhanced underwriting standards and improved loss ratios in their medical stop-loss product. In addition, Independence Holding’s subsidiaries continue to place increasing emphasis on business written through controlled distribution. Furthermore, due to the implications of the Affordable Care Act (ACA), Independence Holding’s subsidiaries moved away from individual and small group major medical to fully insured ancillary medical offerings and pet insurance. While these new insurance products are not expected to produce as much premium as major medical over the near term, Independence Holding’s subsidiaries remain focused on underwriting and pricing discipline and measured profitable growth. These efforts have enabled Madison National, Standard Security and Independence American to generate profitable operating results and maintain adequate levels of risk-adjusted capital.

While Independence Holding’s combined earnings remain favorable, A.M. Best is concerned with the group’s 2013 operating and net income decline driven primarily by higher loss ratios in its major medical line of business, as the utilization increased in advance of the ACA implementation. In addition, investment income was lower following the reduction in invested assets related to a reinsurance transaction of an annuity block of business at Madison National. While underwriting results improved substantially during the first nine months of 2014 as Independence Holding’s subsidiaries discontinued the majority of its major medical policies and realized substantial improvement in loss ratios, the investment income experienced further decline, primarily as a result of a lower interest rate environment. Lower earnings combined with premium growth, as well as the payment of stockholder dividends resulted in lower risk-adjusted capitalization at Standard Security and Independence American at year-end 2013. Although the group’s risk-adjusted capitalization remains adequate, A.M. Best is concerned if the future growth of capital will keep pace with the anticipated growth of stop-loss premium.

Furthermore, A.M. Best notes that Independence Holding’s financial leverage is manageable at about 13%; however, the interest coverage weakened in 2013 compared with previous years, as lower earnings before interest and taxes was further pressured by sizeable unrealized losses on the investment portfolio, although unrealized losses have all but disappeared in 2014.

A.M. Best believes that a positive rating movement for Independence Holding and its subsidiaries is unlikely in the near- to-medium term. Factors that could lead to a negative rating action for Independence Holding and its subsidiaries include deterioration of risk-adjusted capital within the insurance subsidiaries, a prolonged period of declining net premium within the organization’s core lines of business or significant changes in the profitability of the group.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Key insurance criteria reports utilized:

• A.M. Best's Liquidity Model for U.S. Life Insurers
• Rating Members of Insurance Groups
• Risk Management and the Rating Process for Insurance Companies
• Understanding BCAR for U.S. and Canadian Life/Health Insurers
• Insurance Holding Company and Debt Ratings

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please visit A.M. Best’s Ratings & Criteria Center.

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