Claim Reserves. Claim reserves are established by the Insurance Subsidiaries for benefit payments which have already been incurred by the policyholder but which have not been paid by the applicable Insurance Subsidiary. Claim reserves totaled $26.2 million at December 31, 2003 as compared to $30.9 million at December 31, 2002. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.
RESTRUCTURING OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND NOTES PAYABLE TO RELATED PARTY
In our opinion, the 2001 consolidated financial statements listed in the accompanying index present fairly, in all material respects, the results of operations and cash flows of Ascent Assurance, Inc. and its subsidiaries for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules as of December 31, 2001 and for the year ended December 31, 2001 listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used, and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The Company’s operations are comprised of one segment, Accident and Health insurance. The principal products currently underwritten are medical expense reimbursement and supplemental policies. The Company, through applicable subsidiaries, also derives fee and service revenue from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iv) commissions on the sale of the benefits of unaffiliated membership benefit programs.
Also, under SFAS 150, amounts paid in excess of the initial measurement amount to holders of the mandatorily redeemable preferred stock classified as liabilities are to be reflected in interest cost. All amounts paid to or accrued prior to the reclassification of the stock as a liability shall not be reclassified as interest cost upon implementation. As a result, the Company reflected in interest costs the dividends paid or accrued to the holders of the Series A Redeemable Convertible Preferred Stock for the six-month period ended December 31, 2003. All dividend amounts paid or accrued prior to the implementation of SFAS 150 are reflected as preferred stock dividends.
The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 2003, 2002 and 2001, to the amounts reported in the Company’s consolidated balance sheets:
In 1998, NFIC and AICT entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the Texas Department of Insurance in response to losses sustained in 1997 and 1998 as well as the projected inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of new business in 1998. At December 31, 2003, AICT’s RBC exceeded Company Action Level RBC; however, NFIC’s RBC only exceeded Regulatory Action Level RBC. Both NFIC and AICT are in compliance with the terms of the voluntary consent order.
Basic $ (0.10 ) $ (0.08 ) $ (0.16 ) $ (0.13 )
Net Cash Used For Operating Activities (3,637 ) (2,342 ) (4,256 )