UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þ		QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-14953

 

HEALTHMARKETS, INC.

Delaware		75-2044750
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

     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 þ No o

     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 þ No o

     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 o		Accelerated filer o		Non-accelerated filer þ		Smaller reporting company o
				(Do not check if a 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 o No þ

     On July 15, 2011, the registrant had 28,157,645 outstanding shares of Class A-1 Common Stock, $.01 Par Value, and 2,946,040 outstanding shares of Class A-2 Common Stock, $.01 Par Value.

 

 

HEALTHMARKETS, INC.
and Subsidiaries

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4. Controls and Procedures			33
PART II OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 3. Defaults Upon Senior Securities			34
Item 5. Other Information			34
Item 6. Exhibits			35
SIGNATURES
EX-3.1
EX-10.2
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

HEALTHMARKETS, INC.
and Subsidiaries

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

		Page
Consolidated Condensed Balance Sheets as of June 30, 2011 and December 31, 2010			2
Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2011 and 2010			3
Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2011 and 2010			4
Consolidated Condensed Statements of Cash Flows for the Three and Six Months Ended June 30, 2011 and 2010			5
Notes to Consolidated Condensed Financial Statements			6

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)

		June 30,				December 31,
		2011				2010
		(Unaudited)
ASSETS
Investments:
Securities available for sale —
Fixed maturities, at fair value (cost: 2011 - $479,061; 2010 - $644,661)		$	509,031			$	679,405
Short-term and other investments			528,255				373,023
Total investments			1,037,286				1,052,428
Cash and cash equivalents			16,492				12,874
Student loan receivables			55,379				60,312
Restricted cash			13,780				13,170
Investment income due and accrued			5,221				7,139
Reinsurance recoverable — ceded policy liabilities			361,014				363,243
Agent and other receivables			25,935				32,508
Deferred acquisition costs			22,391				32,689
Property and equipment, net of accumulated depreciation of $153,312 and $147,493 at June 30, 2011 and December 31, 2010, respectively			39,105				41,039
Goodwill			40,384				40,384
Other intangible assets			40,855				41,947
Recoverable federal income taxes			4,211				3,443
Other assets			18,375				15,776
Assets held for sale			2,100				2,699
		$	1,682,528			$	1,719,651
LIABILITIES AND STOCKHOLDERS’ EQUITY
Policy liabilities:
Future policy and contract benefits		$	480,208			$	453,773
Claims			114,329				208,675
Unearned premiums			30,114				34,862
Other policy liabilities			24,517				7,687
Accounts payable and accrued expenses			26,786				38,131
Other liabilities			50,094				58,868
Deferred federal income taxes			70,233				58,883
Debt			553,420				553,420
Student loan credit facility			64,050				68,650
Net liabilities of discontinued operations			1,442				1,574
			1,415,193				1,484,523
Commitments and Contingencies (Note 11)
Stockholders’ equity:
Preferred stock, par value $0.01 per share — authorized 10,000,000 shares, none issued			—				—
Common Stock, Class A-1, par value $0.01 per share — authorized 90,000,000 shares, 28,276,279 issued and 28,157,645 outstanding at June 30, 2011; 28,281,859 issued and 28,256,028 outstanding at December 31, 2010. Class A-2, par value $0.01 per share — authorized 20,000,000 shares, 4,026,104 issued and 2,969,251 outstanding at June 30, 2011; 4,026,104 issued and 2,762,100 outstanding at December 31, 2010			323				323
Additional paid-in capital			50,405				54,772
Accumulated other comprehensive income			20,175				21,981
Retained earnings			209,941				178,313
Treasury stock, at cost (118,634 Class A-1 common shares and 1,056,853 Class A-2 common shares at June 30, 2011; 25,831 Class A-1 common shares and 1,264,004 Class A-2 common shares at December 31, 2010)			(13,509	)			(20,261	)
			267,335				235,128
		$	1,682,528			$	1,719,651

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
REVENUE
Health premiums		$	133,243			$	188,914			$	284,444			$	394,687
Life premiums and other considerations			390				498				856				1,149
			133,633				189,412				285,300				395,836
Investment income			7,240				10,840				16,205				22,111
Commissions and other income			21,099				16,890				41,633				30,539
Realized gains, net			2,572				2,422				6,430				2,641
			164,544				219,564				349,568				451,127
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses			91,722				99,952				195,688				221,748
Underwriting, acquisition, and insurance expenses			25,423				43,709				55,654				97,298
Other expenses			40,804				49,842				79,339				96,112
Interest expense			5,434				7,268				12,545				15,460
			163,383				200,771				343,226				430,618
Income from continuing operations before income taxes			1,161				18,793				6,342				20,509
Federal income tax expense			545				8,389				2,562				9,337
Income from continuing operations			616				10,404				3,780				11,172
Income from discontinued operations, (net of income tax expense of $5 and $13 for the three and six months ended June 30, 2011, and $7 and $14 for the three and six months ended June 30, 2010, respectively)			10				13				24				27
Net income		$	626			$	10,417			$	3,804			$	11,199
Basic earnings per share:
Income from continuing operations		$	0.02			$	0.35			$	0.13			$	0.38
Income from discontinued operations			0.00				0.00				0.00				0.00
Net income per share, basic		$	0.02			$	0.35			$	0.13			$	0.38
Diluted earnings per share:
Income from continuing operations		$	0.02			$	0.34			$	0.12			$	0.37
Income from discontinued operations			0.00				0.00				0.00				0.00
Net income per share, diluted		$	0.02			$	0.34			$	0.12			$	0.37

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Net income		$	626			$	10,417			$	3,804			$	11,199
Other comprehensive income (loss):
Unrealized gains on securities available for sale arising during the period			4,572				17,543				2,312				28,874
Reclassification for investment gains included in net income			(2,572	)			(2,427	)			(6,430	)			(2,646	)
Other-than-temporary impairment losses recognized in OCI			—				—				—				—
Effect on other comprehensive income (loss) from investment securities			2,000				15,116				(4,118	)			26,228
Unrealized gains (losses) on derivatives used in cash flow hedging during the period			—				21				(4	)			(466	)
Reclassification adjustments included in net income			100				1,468				1,344				3,972
Effect on other comprehensive income from hedging activities			100				1,489				1,340				3,506
Other comprehensive income before tax			2,100				16,605				(2,778	)			29,734
Income tax expense (benefit) related to items of other comprehensive income			735				5,812				(972	)			10,408
Other comprehensive income (loss) net of tax			1,365				10,793				(1,806	)			19,326
Comprehensive income		$	1,991			$	21,210			$	1,998			$	30,525

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

		Six Months Ended
		June 30,
		2011				2010
Operating Activities:
Net income		$	3,804			$	11,199
Adjustments to reconcile net income to cash (used in) provided by operating activities:
Income from discontinued operations			(24	)			(27	)
Realized gains, net			(6,430	)			(2,641	)
Change in deferred income taxes			(2,661	)			(5,808	)
Depreciation and amortization			9,645				11,450
Amortization of prepaid monitoring fees			6,250				7,500
Equity based compensation expense			3,145				(1,766	)
Other items, net			2,610				7,166
Changes in assets and liabilities:
Investment income due and accrued			1,208				(283	)
Due premiums			2				1,111
Reinsurance recoverable — ceded policy liabilities			2,229				322
Other receivables			8,928				(7,818	)
Deferred acquisition costs			10,298				17,473
Prepaid monitoring fees			(12,500	)			(15,000	)
Current income tax recoverable			(768	)			20,057
Policy liabilities			(12,317	)			(52,266	)
Other liabilities and accrued expenses			(16,168	)			(22,886	)
Cash used in continuing operations			(2,749	)			(32,217	)
Cash used in discontinued operations			(108	)			(87	)
Net cash used in operating activities			(2,857	)			(32,304	)
Investing Activities:
Student loan receivables			4,155				4,280
Securities available for sale			171,339				107,554
Short-term and other investments, net			(155,109	)			55,838
Purchases of property and equipment			(3,885	)			(5,689	)
Intangible assets acquired			—				(297	)
Acquisitions net of cash acquired			—				252
Change in restricted cash			(610	)			(178	)
Increase in agent receivables			(704	)			(997	)
Cash provided by continuing operations			15,186				160,763
Cash provided by discontinued operations			—				—
Net cash provided by investing activities			15,186				160,763
Financing Activities:
Repayment of student loan credit facility			(4,600	)			(4,900	)
Decrease in investment products			(705	)			(3,775	)
Change in cash overdraft			(67	)			2,607
Proceeds from shares issued to agent plans and other			2,207				4,265
Purchases of treasury stock			(4,909	)			(7,855	)
Dividends paid			—				(120,652	)
Excess tax reduction from equity based compensation			(637	)			(1,086	)
Cash used in continuing operations			(8,711	)			(131,396	)
Cash used in discontinued operations			—				—
Net cash used in financing activities			(8,711	)			(131,396	)
Net change in cash and cash equivalents			3,618				(2,937	)
Cash and cash equivalents at beginning of period			12,874				17,406
Cash and cash equivalents at end of period in continuing operations		$	16,492			$	14,469
Supplemental disclosures:
Income taxes paid		$	6,643			$	808
Interest paid		$	8,176			$	14,279

See Notes to Consolidated Condensed Financial Statements.

HEALTHMARKETS, INC.
and Subsidiaries

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

     The accompanying consolidated condensed financial statements for HealthMarkets, Inc. (the “Company” or “HealthMarkets”) and its subsidiaries have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair presentation of the consolidated condensed balance sheets, statements of income, statements of comprehensive income and statements of cash flows for the periods presented. The accompanying December 31, 2010 consolidated condensed balance sheet was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP for annual financial statement purposes. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that HealthMarkets may undertake in the future, actual results may differ materially from the estimates. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2011. We have evaluated subsequent events for recognition or disclosure through the date we filed this Form 10-Q with the Securities and Exchange Commission (the “SEC”). For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

     HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in its wholly owned subsidiary, HealthMarkets, LLC. HealthMarkets, LLC’s principal assets are its investments in its separate operating subsidiaries, including its regulated insurance subsidiaries. HealthMarkets conducts its insurance underwriting businesses through its indirect wholly owned insurance company subsidiaries, The MEGA Life and Health Insurance Company (“MEGA”), Mid-West National Life Insurance Company of Tennessee (“Mid-West”) and The Chesapeake Life Insurance Company (“Chesapeake”), and conducts its insurance distribution business through its indirect insurance agency subsidiary, Insphere Insurance Solutions, Inc. (“Insphere”).

Reclassification

     Certain amounts in the 2010 financial statements have been reclassified to conform to the 2011 financial statement presentation.

2. CHANGE IN ACCOUNTING PRINCIPLE

     Effective January 1, 2011, the Company changed the method used to calculate its policy liabilities for the majority of its health insurance products because it believes that the new method will be preferable in light of, among other factors, certain changes required by Health Care Reform Legislation.

     For the majority of health insurance products in the Commercial Health Division, the Company’s claims liabilities are estimated using the developmental method. The Company establishes the claims liabilities based upon claim incurral dates, supplemented with certain refinements as appropriate. Prior to January 1, 2011, for products introduced prior to 2008, the Company used a technique for calculating claims liabilities referred to as the Modified Incurred Date (“MID”) technique. Under the MID technique, claims liabilities for the cost of all medical services related to a distinct accident or sickness are based on the earliest date of diagnosis or treatment, even though the medical services associated with such accident or sickness might not be rendered to the insured until a later financial reporting period. Claims liabilities based on the earliest date of diagnosis generally result in larger initial claims liabilities which complete over a longer period of time than claims estimation techniques using dates of service. Under the MID technique, the Company modifies the original incurred date coding by establishing a new incurral date if: (i) there is a break of more than six months in the occurrence of a covered benefit service or (ii) if claims payments continue for more than thirty-six months without a six month break in service.

     For products introduced in 2008 and later, claims payments are considered incurred on the date the service is rendered, regardless of whether the sickness or accident is distinct or the same. This is referred to as the Service Date

(“SD”) technique. This is consistent with the assumptions used in the pricing of these products and the policy language. At December 31, 2010, the Company had claims liabilities for products using the SD technique in the amount of $10.6 million, representing approximately 8% of the total claims liabilities of the Commercial Health Division. The use of the SD technique in establishing claims liabilities requires the establishment of a future policy benefit reserve while the MID technique does not. For the reasons discussed below, we believe that it is preferable to estimate the Company’s claims liabilities using the SD technique, and to apply such technique for claims liabilities previously calculated based on the MID technique.

     As previously disclosed, in March 2010, Health Care Reform Legislation was signed into law. The Health Care Reform Legislation requires, beginning in 2011, a mandated minimum loss ratio (“MLR”) of 80% for the individual and small group markets. If MLR is below the mandated minimum, the Health Care Reform Legislation generally requires that the insurer return the amount of premium that is in excess of the required MLR to the policyholder in the form of rebates. The MLR is calculated for each of our insurance subsidiaries on a state-by-state basis in each state where the Company has issued major medical business. The Interim Final Rule from the Department of Health and Human Services (“HHS”) indicates that the MLR calculation shall utilize data on incurred claims for the calendar year, paid through March of the following year.

     Any refund of premiums in excess of the required MLR will be based on the completion of claims three months after the calendar year end. Based on the MLR calculation requiring only three additional months of claims and the SD technique being the most prevalent method of estimating claims liabilities in the health insurance industry, the Company believes that the SD technique is the preferable method for calculating the MLR. The Company also believes that using the SD method for the settlement of the MLR calculation will reduce uncertainty regarding the ultimate amount of incurred claims, as the MID technique estimates claims over a longer settlement period. The calculation of the MLR using the Company’s current data results in claims for a given incurred year that are approximately 95% complete three months after the valuation date using the SD technique, whereas claims are approximately 82% complete 3 months after the valuation date using the MID technique. Additionally, the use of the MID technique for financial reporting purposes, with the settlement of the MLR calculated on a SD basis, may result in an over accrual of the claims liabilities on the financial statements as a result of the Company’s accrual for rebates in the MLR calculation.

     In light of the changes resulting from the Health Care Reform Legislation, and given that the Company’s insurance contracts would support the use of either reserving technique, the Company, after discussions with its domiciliary insurance regulators on the preferred methodology for calculating rebates under the MLR requirements of the Health Care Reform Legislation, determined that the SD method is preferable in determining the estimation of its claims liabilities. For the in-force policies utilizing the MID technique for estimation of claims liabilities, effective January 1, 2011, the Company changed the method used to calculate its claims liabilities from the MID technique to the SD technique. Consistent with the Company’s products introduced in 2008 and later, the Company established a reserve for future policy benefits for products introduced prior to 2008.

     The Company has determined it is impracticable to determine the period-specific effects of the change in reserving methodology from MID to SD on all prior periods since retrospective application requires significant estimates of amounts and it is impossible to distinguish objectively information about those estimates at previous reporting dates. Based on the guidance of ASC 250-10-45 Accounting Changes — Change in Accounting Principle if the cumulative effect of applying a change in accounting principle to all prior periods is determinable, but it is impracticable to determine the period-specific effects of that change to all prior periods presented, the cumulative effect of the change to the new accounting principle shall be applied to the carrying amounts of assets and liabilities as of beginning of the earliest period to which the new accounting principle can be applied. As such the Company accounted for the change effective January 1, 2011 by recording the cumulative effect of the change in accounting at that date.

     Effective January 1, 2011, as a result of this change, the Company recorded the following: (i) a decrease in the amount of $77.9 million to claims and claims administration liabilities, (ii) an increase in the amount of $35.1 million to future policy and contract benefits, (iii) an increase in the amount of $15.0 million to deferred federal income tax liability and (iv) an increase in the amount of $27.8 million to retained earnings.

3. CONCENTRATIONS

     Insphere maintains marketing agreements for the distribution of health benefits plans with a number of non-affiliated insurance carriers as well as the Company’s own insurance subsidiaries. The non-affiliated carriers include, among others, United Healthcare’s Golden Rule Insurance Company, Humana and Aetna, for which Insphere distributes individual health insurance products. The products offered by these third-party carriers and the Company’s insurance subsidiaries offer

coverage and benefit variations that may fit one consumer better than another. In the markets where Insphere has commenced distribution of these third-party carrier products, these products have, to a great extent, replaced the sale of the Company’s own health benefit plans. During the six months ended June 30, 2011, approximately 79% of health benefit plan sales marketed by Insphere were underwritten by these three third-party carriers.

     Additionally, during the six months ended June 30, 2011, the Company’s insurance subsidiaries generated approximately 56% of premium revenue from new and existing business from the following 10 states:

		Percentage
California			14	%
Texas			7	%
Maine			6	%
Florida			6	%
Washington			5	%
Massachusetts			5	%
Illinois			4	%
North Carolina			3	%
Pennsylvania			3	%
Georgia			3	%
			56	%

4. RECENT ACCOUNTING PRONOUNCEMENTS

     In October 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-26, Financial Services — Insurance (ASC Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (“ASU 2010-26”), which clarifies what costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that should be capitalized include (1) incremental direct costs of successful contract acquisition and (2) certain costs related directly to successful acquisition activities (underwriting, policy issuance and processing, medical and inspection, and sales force contract selling) performed by the insurer for the contract. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the U.S. GAAP direct-response advertising guidance are met. All other acquisition-related costs should be charged to expense as incurred. The provisions of ASU 2010-26 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and should be applied prospectively. Retrospective application is permitted, and early adoption is permitted at the beginning of an entity’s annual reporting period. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2010-26.

     During the first quarter of 2010, the Company adopted ASC Update 2010-06, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC Subtopic 820-10 to require new disclosures around the transfers in and out of Level 1 and Level 2 and around activity in Level 3 fair value measurements. Such guidance also provides amendments to ASC 820 which clarifies existing disclosures on the level of disaggregation, inputs and valuation techniques. Certain disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements are effective for fiscal years beginning after December 15, 2010. The Company implemented these additional disclosure items in the first quarter of 2011.

     On May 12, 2011, the International Accounting Standards Board (“IASB”) and the FASB issued IFRS 13, Fair Value Measurement, and FASB ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, respectively, to provide largely identical guidance about fair value measurement and disclosure requirements. Issuing these standards completes a major project of the Boards’ joint work to improve and converge IFRS and U.S. GAAP. The new standards do not extend the use of fair value but, rather, provide guidance about how fair value should be applied where it already is required or permitted under IFRS or U.S. GAAP. For U.S. GAAP, most of the changes are clarifications of existing guidance or wording changes to align with IFRS 13. A public entity is required to apply the ASU prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted for a public entity. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2011-04.

     In June 2011, the FASB issued ASU 2011-05 Presentation of Comprehensive Income. This ASU eliminates the option in U.S. GAAP to present other comprehensive income in the statement of changes in equity. For a public entity, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2011-05.

5. FAIR VALUE MEASUREMENTS

     In accordance with ASC 820, the Company categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

•

Level 1 — Unadjusted quoted market prices for identical assets or liabilities in active markets which are accessible by the Company.

•

Level 2 — Observable prices in active markets for similar assets or liabilities. Prices for identical or similar assets or liabilities in markets which are not active. Directly observable market inputs for substantially the full term of the asset or liability, such as interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are not directly observable but are derived from or corroborated by observable market data.

•

Level 3 — Unobservable inputs based on the Company’s own judgment as to assumptions a market participant would use, including inputs derived from extrapolation and interpolation that are not corroborated by observable market data.

     The Company evaluates the various types of securities in its investment portfolio to determine the appropriate level in the fair value hierarchy based upon trading activity and the observability of market inputs. The Company employs control processes to validate the reasonableness of the fair value estimates of its assets and liabilities, including those estimates based on prices and quotes obtained from independent third party sources. The Company’s procedures generally include, but are not limited to, initial and ongoing evaluation of methodologies used by independent third parties and monthly analytical reviews of the prices against current pricing trends and statistics.

     Where possible, the Company utilizes quoted market prices to measure fair value. For investments that have quoted market prices in active markets, the Company uses the quoted market price as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. When quoted market prices in active markets are unavailable, the Company determines fair values using various valuation techniques and models based on a range of observable market inputs including pricing models, quoted market price of publicly traded securities with similar duration and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In most cases, these estimates are determined based on independent third party valuation information, and the amounts are disclosed in Level 2 of the fair value hierarchy. Generally, the Company obtains a single price or quote per instrument from independent third parties to assist in establishing the fair value of these investments.

     If quoted market prices and independent third party valuation information are unavailable, the Company produces an estimate of fair value based on internally developed valuation techniques, which, depending on the level of observable market inputs, will render the fair value estimate as Level 2 or Level 3. On occasions when pricing service data is unavailable, the Company may rely on bid/ask spreads from dealers in determining the fair value. When dealer quotations are used to assist in establishing the fair value, the Company generally obtains one quote per instrument. The quotes obtained from dealers or brokers are generally non-binding. When dealer quotations are used, the Company uses the mid-mark as fair value. When broker or dealer quotations are used for valuation or price verification, greater priority is given to executable quotes. As part of the price verification process, valuations based on quotes are corroborated by comparison both to other quotes and to recent trading activity in the same or similar instruments.

     To the extent the Company determines that a price or quote is inconsistent with actual trading activity observed in that investment or similar investments, or if the Company does not think the quote is reflective of the market value for the investment, the Company will internally develop a fair value using this observable market information and disclose the occurrence of this circumstance.

     In accordance with ASC 820, the Company has categorized its available for sale securities into a three level fair value hierarchy based on the priority of inputs to the valuation techniques. The fair values of investments disclosed in Level 1 of the fair value hierarchy include money market funds and certain U.S. government securities, while the investments disclosed in Level 2 include the majority of the Company’s fixed income investments. In cases where there is limited activity or less transparency around inputs to the valuation, the Company classifies the fair value estimates within Level 3 of the fair value hierarchy.

     As of June 30, 2011, all of the Company’s investments classified within Level 2 and Level 3 of the fair value hierarchy are valued based on quotes or prices obtained from independent third parties, except for $109.0 million of “Corporate bonds and municipal” classified as Level 2, $86.6 million of “Other Bonds” classified as Level 2 and $704,000

of “Commercial-backed” investments classified as Level 3. The “Corporate bonds and municipal” investments classified as Level 2 noted above includes $101.3 million of an investment grade corporate bond issued by UnitedHealth Group Inc. that was received as consideration for the sale of the Company’s former Student Insurance Division in December 2006. The $86.6 million of “Other bonds” classified as Level 2 was received from a unit of the CIGNA Corporation as consideration for the receipt of the former Star HRG assets.

Fair Value Hierarchy on a Recurring Basis

     Assets and liabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations.

		Assets at Fair Value at June 30, 2011
		Level 1				Level 2				Level 3				Total
		(In thousands)
U.S. and U.S. Government agencies		$	4,592			$	30,055			$	—			$	34,647
Corporate bonds and municipals			—				291,626				—				291,626
Residential-backed issued by agencies			—				61,966				—				61,966
Commercial-backed issued by agencies			—				2,104				—				2,104
Residential-backed			—				329				—				329
Commercial-backed			—				26,569				704				27,273
Asset-backed			—				4,458				—				4,458
Other bonds			—				86,628				—				86,628
Other invested assets (1)			—				—				2,648				2,648
Short-term investments (2)			503,956				—				—				503,956
		$	508,548			$	503,735			$	3,352			$	1,015,635

Liabilities at Fair Value at June 30, 2011

Level 1

Level 2

Level 3

Total

(In thousands)

Agent and employee plans

—

—

4,217

4,217

		Assets at Fair Value at December 31, 2010
		Level 1				Level 2				Level 3				Total
		(In thousands)
U.S. and U.S. Government agencies		$	4,611			$	51,655			$	—			$	56,266
Corporate bonds and municipals			—				402,883				—				402,883
Residential-backed issued by agencies			—				72,684				—				72,684
Commercial-backed issued by agencies			—				5,392				—				5,392
Residential-backed			—				2,410				—				2,410
Commercial-backed			—				44,367				916				45,283
Asset-backed			—				8,095				—				8,095
Other bonds			—				86,392				—				86,392
Other invested assets (1)			—				—				2,000				2,000
Short-term investments (2)			347,121				—				—				347,121
		$	351,732			$	673,878			$	2,916			$	1,028,526

		Liabilities at Fair Value at December 31, 2010
		Level 1				Level 2				Level 3				Total
		(In thousands)
Interest rate swaps		$	—			$	2,367			$	—			$	2,367
Agent and employee plans			—				—				6,238				6,238
		$	—			$	2,367			$	6,238			$	8,605

     The following is a description of the valuation methodologies used for certain assets and liabilities of the Company measured at fair value on a recurring basis, including the general classification of such assets pursuant to the valuation hierarchy.

Fixed Income Investments

     Available for sale investments

     The Company’s fixed income investments include investments in U.S. Treasury securities, U.S. Government agency bonds, corporate bonds, mortgage-backed and asset-backed securities, and municipal securities and bonds.

     The Company estimates the fair value of its U.S. Treasury securities using unadjusted quoted market prices, and accordingly, discloses these investments in Level 1 of the fair value hierarchy. The fair values of the majority of non-U.S. treasury securities held by the Company are determined based on observable market inputs provided by independent third party valuation information. The market inputs utilized in the pricing evaluation include but are not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The Company classifies the fair value estimates based on these observable market inputs within Level 2 of the fair value hierarchy. Investments classified within Level 2 consist of U.S. government agencies bonds, corporate bonds, mortgage-backed and asset-backed securities, and municipal bonds.

     The Company also holds a fixed income commercial asset-backed investment for which it estimates the fair value using an internal pricing matrix with some unobservable inputs that are significant to the valuation. Consequently, the lack of transparency in the inputs and availability of independent third party pricing information for this investment resulted in its fair value being classified within the Level 3 of the hierarchy. As of June 30, 2011, the fair value of such commercial asset-backed security which represents approximately 0.1% of the Company’s total fixed income investments is reflected within the Level 3 of the fair value hierarchy.

Other invested assets

     The Company’s other invested assets consist of one alternative investment that owns a portfolio of collateralized debt obligation equity investments managed by a third party management group. The Company calculates the fair market value of such investment using the net asset value per share, which is determined based on unobservable inputs. Accordingly, the fair value of this asset is reflected within Level 3 of the fair value hierarchy.

     The Company has committed to fund $5.0 million to such equity investment, of which the entire amount has been funded to date. There are no redemption opportunities, and the fund will terminate when the underlying collateralized debt obligation deals mature.

Short-term investments

     The Company’s short-term investments primarily consist of highly liquid money market funds, which are reflected within Level 1 of the fair value hierarchy.

Derivatives

     For the period ended December 31, 2010, the Company’s derivative instruments were valued utilizing valuation models that primarily use market observable inputs and are traded in the markets where quoted market prices are not readily available, and accordingly, these instruments are reflected within the Level 2 of the fair value hierarchy. As of April 11, 2011 all derivative instruments have matured.

Agent and Employee Stock Plans

     The Company accounts for its agent and certain employee stock plan liabilities based on the Company’s share price at the end of each reporting period. The Company’s share price at the end of each reporting period is based on the prevailing fair value as determined by the Company’s Board of Directors (see Note 12 of Notes to Consolidated Condensed Financial Statements). The Company largely uses unobservable inputs in deriving the fair value of its share price and the value is, therefore, reflected in Level 3 of the hierarchy.

Changes in Level 3 Assets and Liabilities

     The tables below summarize the change in balance sheet carrying values associated with Level 3 financial instruments and agent and employee stock plans for the three and six months ended June 30, 2011.

						Changes in Level 3 Assets and Liabilities Measured at Fair Value
						For the Three Months Ended June 30, 2011
						Unrealized												Realized				Transfer
		Beginning				Gains or				Sales or								Gains or				in/(out) of				Ending
		Balance				(Losses)				Redemption				Settlements				(Losses)(1)				Level 3, Net				Balance
		(In thousands)
ASSETS
Commercial-backed		$	810			$	(8	)		$	(101	)		$	3			$	—			$	—			$	704
Other invested assets			2,613				38				—				(3	)			—				—				2,648
		$	3,423			$	30			$	(101	)		$	—			$	—			$	—			$	3,352
LIABILITIES
Agent and employee stock plans		$	3,538			$	86			$	—			$	593			$	—			$	—			$	4,217

						Changes in Level 3 Assets and Liabilities Measured at Fair Value
						For the Six Months Ended June 30, 2011
						Unrealized												Realized				Transfer
		Beginning				Gains or				Sales or								Gains or				in/(out) of				Ending
		Balance				(Losses)				Redemption				Settlements				(Losses)(1)				Level 3, Net				Balance
		(In thousands)
ASSETS
Commercial-backed		$	916			$	(19	)		$	(199	)		$	6			$	—			$	—			$	704
Other invested assets			2,000				656				—				(8	)			—				—				2,648
		$	2,916			$	637			$	(199	)		$	(2	)		$	—			$	—			$	3,352
LIABILITIES
Agent and employee stock plans		$	6,238			$	230			$	—			$	(2,251	)		$	—			$	—			$	4,217

     During the six months ended June 30, 2011, the Company did not transfer securities between Level 1, Level 2 and Level 3.

Investments not reported at fair value

     Other investments consists of investments in equity investees, which are accounted for under the equity method of accounting on the Company’s consolidated condensed balance sheet at cost.

6. INVESTMENTS

     The Company’s investments consist of the following at June 30, 2011 and December 31, 2010:

		June 30,				December 31,
		2011				2010
		(In thousands)
Securities available for sale
Fixed maturities		$	509,031			$	679,405
Short-term and other investments			528,255				373,023
Total investments		$	1,037,286			$	1,052,428

     Available for sale fixed maturities are reported at fair value which was derived as follows:

		June 30, 2011
						Gross				Gross				Non-credit Loss
		Amortized				Unrealized				Unrealized				Recognized
		Cost				Gains				Losses				in OCI				Fair Value
		(In thousands)
U.S. and U.S. Government agencies		$	33,944			$	703			$	—			$	—			$	34,647
Corporate bonds and municipals			275,190				16,897				(461	)			—				291,626
Residential-backed issued by agencies			58,188				3,779				(1	)			—				61,966
Commercial-backed issued by agencies			2,050				54				—				—				2,104
Residential-backed			328				1				—				—				329
Commercial-backed			26,489				784				—				—				27,273
Asset-backed			4,476				275				(12	)			(281	)			4,458
Other bonds			78,396				8,232				—				—				86,628
Total fixed maturities		$	479,061			$	30,725			$	(474	)		$	(281	)		$	509,031

		December 31, 2010
						Gross				Gross				Non-credit Loss
		Amortized				Unrealized				Unrealized				Recognized
		Cost				Gains				Losses				in OCI				Fair Value
		(In thousands)
U.S. and U.S. Government agencies		$	55,338			$	1,006			$	(78	)		$	—			$	56,266
Corporate bonds and municipals			383,188				21,133				(1,438	)			—				402,883
Residential-backed issued by agencies			68,932				3,827				(75	)			—				72,684
Commercial-backed issued by agencies			5,156				236				—				—				5,392
Residential-backed			2,344				66				—				—				2,410
Commercial-backed			43,261				2,022				—				—				45,283
Asset-backed			8,046				346				(16	)			(281	)			8,095
Other bonds			78,396				7,996				—				—				86,392
Total fixed maturities		$	644,661			$	36,632			$	(1,607	)		$	(281	)		$	679,405

     The amortized cost and fair value of available for sale fixed maturities at June 30, 2011, by contractual maturity, are set forth in the table below. Fixed maturities subject to early or unscheduled prepayments have been included based upon their contractual maturity dates. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		June 30, 2011
		Amortized
		Cost				Fair Value
		(In thousands)
Maturity:
One year or less		$	36,336			$	36,718
Over 1 year through 5 years			87,935				92,666
Over 5 years through 10 years			239,720				258,933
Over 10 years			23,539				24,584
			387,530				412,901
Mortgage-backed and asset-backed securities			91,531				96,130
Total fixed maturities		$	479,061			$	509,031

     See Note 5 of Notes to Consolidated Condensed Financial Statements for additional disclosures on fair value measurements.

     A summary of net investment income by source is set forth below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Fixed maturities		$	6,384			$	9,104			$	13,654			$	18,601
Equity securities			—				(10	)			—				—
Short-term and other investments			448				825				1,713				1,476
Agent receivables			82				245				173				694
Student loan interest income			821				1,053				1,662				2,123
			7,735				11,217				17,202				22,894
Less investment expenses			495				377				997				783
		$	7,240			$	10,840			$	16,205			$	22,111

Realized Gains and Losses

     Realized gains and losses on sales of investments are recognized in net income on the specific identification basis and include write downs on those investments deemed to have other than temporary declines in fair values. Gains and losses on trading securities are reported in “Realized gains, net” on the consolidated condensed statements of income. Net realized capital gains for the three and six months ended 2011 and 2010 were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
		(In thousands)
Other-than-temporary impairment (“OTTI”) losses		$	—			$	—			$	—			$	—
Portion of OTTI losses recognized in (released from) other comprehensive income			—				—				—				—
Net impairment losses recognized in earnings			—				—				—				—
Net realized capital gains, excluding OTTI losses on securities			2,572				2,422				6,430				2,641
Realized gains, net		$	2,572			$	2,422			$	6,430			$	2,641

     Fixed maturities

     Proceeds from the sale and call of investments in fixed maturities were $66.5 million and $128.1 million for the three and six months ended June 30, 2011, respectively, and $61.0 million and $77.7 million for the three and six months ended June 30, 2010, respectively. Proceeds from maturities, sinking and principal reductions amounted to $26.9 million and $49.5 million for the three and six months ended June 30, 2011, respectively, and $8.2 million and $29.7 million for the three and six months ended June 30, 2010, respectively. During the three and six months ended June 30, 2011, the Company realized gross gains of $2.6 million and $6.4 million, respectively, on the sale and call of fixed maturity investments. During the three and six months ended June 30, 2010, the Company realized gross gains of $2.4 million and $2.6 million, respectively, on the sale and call of fixed maturity investments. The Company realized no gross losses in 2011 and realized gross losses of $16,000 during 2010.

Other than temporary impairment (“OTTI”)

     During the six months ended June 30, 2011, the Company recognized no OTTI losses.

     Set forth below is a summary of cumulative OTTI losses on debt securities held by the Company at June 30, 2011, a portion of which have been recognized in “Net impairment losses recognized in earnings” on the consolidated condensed statement of income and a portion of which have been recognized in “Accumulated other comprehensive income” on the consolidated condensed balance sheet:

								Reductions for
credit losses				Additions to OTTI				increases in cash		Cumulative OTTI
credit losses		Additions to OTTI		securities where				flows expected to		credit losses
credit losses		securities where no		credit losses have		Reductions for		be collected that		recognized for
recognized for		credit losses were		been recognized		securities sold		are recognized		securities still held
securities still heldat		recognized prior to		prior to		during the period		over the remaining		at
January 1, 2011		January 1, 2011		January 1, 2011		(Realized)		life of the security		June 30, 2011
(In thousands)
$4,104		$—		$—		$(586)		$—		$3,518

Unrealized Gains and Losses

     Fixed maturities

     Set forth below is a summary of gross unrealized losses in its fixed maturities as of June 30, 2011 and December 31, 2010:

		June 30, 2011
		Unrealized Loss								Unrealized Loss
		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
U.S. and U.S. Government agencies		$	—			$	—			$	—			$	—			$	—			$	—
Residential-backed issued by agencies			4,503				1				—				—				4,503				1
Commercial-backed issued by agencies			—				—				—				—				—				—
Residential-backed			—				—				—				—				—				—
Commercial-backed			—				—				—				—				—				—
Asset-backed			300				12				1,022				—				1,322				12
Corporate bonds and municipals			—				—				20,411				461				20,411				461
Other bonds			—				—				—				—				—				—
Total		$	4,803			$	13			$	21,433			$	461			$	26,236			$	474

		December 31, 2010
		Unrealized Loss								Unrealized Loss
		Less Than 12 Months								12 Months or Longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
Description of Securities		Value				Losses				Value				Losses				Value				Losses
		(In thousands)
U.S. and U.S. Government agencies		$	16,254			$	78			$	—			$	—			$	16,254			$	78
Residential-backed issued by agencies			4,810				75				—				—				4,810				75
Commercial-backed issued by agencies			—				—				—				—				—				—
Residential-backed			—				—				426				—				426				—
Commercial-backed			—				—				—				—				—				—
Asset-backed			—				—				3,296				16				3,296				16
Corporate bonds and municipals			7,124				57				30,967				1,381				38,091				1,438
Other bonds			—				—				—				—				—				—
Total		$	28,188			$	210			$	34,689			$	1,397			$	62,877			$	1,607

     Unrealized Losses Less Than 12 Months

     Of the $13,000 in unrealized losses that had existed for less than twelve months at June 30, 2011, no security had an unrealized loss in excess of 10% of the security’s cost.

     Unrealized Losses 12 Months or Longer

     Of the $461,000 in unrealized losses that had existed for twelve months or longer at June 30, 2011, no security had an unrealized loss in excess of 10% of the security’s cost.

     All issuers of securities we own remain current on all contractual payments. The Company continually monitors investments with unrealized losses that have existed for twelve months or longer and considers such factors as the current financial condition of the issuer, credit ratings, performance of underlying collateral and effective yields. Additionally, HealthMarkets’ considers whether it has the intent to sell the security and whether it is more likely than not that the Company will be required to sell the debt security before the fair value reverts to its cost basis, which may be at maturity of the security. Based on such review, the Company believes that, as of June 30, 2011, the unrealized losses in these investments were caused by an increase in market interest rates and tighter liquidity conditions in the current markets than when the securities were purchased and therefore, is temporary.

     It is at least reasonably probable that the Company’s assessment of whether the unrealized losses are other than temporary may change over time, given, among other things, the dynamic nature of markets and changes in the Company’s assessment of its ability or intent to hold impaired investment securities, which could result in the Company recognizing other-than-temporary impairment charges or realized losses on the sale of such investments in the future.

7. STUDENT LOANS

     Through its student loan funding vehicles, CFLD-I and UFC2, the Company holds alternative (i.e., non-federally guaranteed) student loans extended to students at selected colleges and universities. The Company’s insurance subsidiaries previously offered an interest-sensitive whole life insurance product with a child term rider. The child term rider included a special provision under which private student loans are issued to help fund the insured child’s higher education could be made available, subject to the terms, conditions and qualifications of the policy and the child term rider. Pursuant to the terms of the child term rider, the making of any student loan is expressly conditioned on the availability of a guarantee for the loan at the time the loan is made. During 2003, the Company discontinued offering the child term rider; however, for policies previously issued, outstanding potential commitments to fund student loans extend through 2026.

     As previously disclosed, the Company’s arrangements with the party previously originating student loans terminated in 2010. The Company is attempting to find a replacement for the Company’s previous originator and lender of student loans; however, there can be no assurance whether and when a new lender will be located. In addition, as discussed above, the making of any student loan is expressly conditioned on the availability of a guarantee for the loan, and there is no longer a guarantor for the student loan program. As a result, loans under the child term rider are not available at this time. The Company does not believe this will have a material impact to the consolidated financial statements.

8. DEBT

     The following table sets forth detail of the Company’s debt and interest expense:

														Interest Expense
		Principal Amount												Three Months Ended								Six Months Ended
		at				Maturity				Interest				June 30,								June 30,
		June 30, 2011				Date				Rate(a)				2011				2010				2011				2010
2006 credit agreement:
Term loan		$	362,500				2012				1.290	%		$	1,313			$	2,519			$	3,671			$	6,031
$75 Million revolver (non-use fee)			—				(b	)			—				2				70				50				140
Grapevine Note			72,350				2021				6.712	%			1,215				1,213				2,412				2,412
Trust preferred securities:
UICI Capital Trust I			15,470				2034				3.761	%			148				151				295				296
HealthMarkets Capital Trust I			51,550				2036				3.297	%			436				437				868				863
HealthMarkets Capital Trust II			51,550				2036				3.297	%			982				1,091				2,060				2,169
Other:
Interest on Deferred Tax Gain			—								4.000	%			528				530				1,053				1,055
Amortization of financing fees			—												810				1,257				2,136				2,494
Total		$	553,420											$	5,434			$	7,268			$	12,545			$	15,460
Student Loan Credit Facility			64,050				(c	)			0.000%	(d)			—				—				—				—
Total		$	617,470											$	5,434			$	7,268			$	12,545			$	15,460