Note 3. Discontinued Operations

6 Months Ended

Jun. 30, 2016

Notes

Note 3. Discontinued Operations

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				Six Months Ended
		June 30,				June 30,
		2016		2015		2016		2015
Revenue	$	-	$	90	$	6,406	$	1,250
Selling, general and administrative expenses		-		172		5,689		301
Pretax profit (loss) of discontinued operations		-		(82)		717		949
Gain on disposal of discontinued
operations, pretax		-		-		116,919		-
Income (loss) from discontinued operations,
before income taxes		-		(82)		117,636		949
Income taxes (benefits) on discontinued operations		(142)		(16)		7,724		385
Income (loss) from discontinued operations	$	142	$	(66)	$	109,912	$	564

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):

		June 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	$	2,410	$	(15)
Liabilities attributable to discontinued operations	$	2,410	$	(15)

Total operating cash flows from discontinued operations for the three months and six months ended June 30, 2016 were $0 and $339,000, respectively, and were $(1,178,000) and $(1,062,000) for the three months and six months ended June 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 9). On a consolidated basis, the Company recorded income taxes on discontinued operations of $7,724,000 for the six months ended June 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.