Note 3. Discontinued Operations

6 Months Ended

Jun. 30, 2016

Notes

Note 3. Discontinued Operations

3.             Discontinued Operations

On March 31, 2016, AMIC 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 medical stop-loss business of 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 $113,521,000, net of taxes, 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”.  AMIC’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 a discontinued operation 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	$	-	$	3,450	$	6,406	$	7,572
Selling, general and administrative expenses		-		(3,293)		(5,564)		(6,406)
Amortization and depreciation		-		(175)		(125)		(347)
Pretax profit of discontinued operations		-		(18)		717		819
Gain on disposal of discontinued operations, pretax		-		-		121,317		-
Income (loss) from discontinued operations, before income taxes		-		(18)		122,034		819
Income taxes on discontinued operations		(22)		(4)		8,047		320
Income (loss) from discontinued operations	$	22	$	(14)	$	113,987	$	499

Total operating cash flows from discontinued operations for the six months ended June 30, 2016 and 2015 amounted to $1,106,000 and $436,000, 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 11) The Company recorded income taxes on discontinued operations of $8,047,000 for the six months ended June 30, 2016, consisting of $5,777,000 of state taxes and $2,270,000 of federal taxes, net of a $38,419,000 decrease in AMIC’s valuation allowance.

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	$	-	$	904
Restricted Cash		-		20,358
Intangible assets		-		786
Other assets		-		9,670
Assets attributable to discontinued operations	$	-	$	31,718
Major classes of liabilities included in discontinued operations:
Premium and claim funds payable	$	-	$	20,358
Accounts payable and accrued liabilities		953		3,979
Liabilities attributable to discontinued operations	$	953	$	24,337