The Company's headquarters are located in Green Bay, Wisconsin, in a 400,000 square foot office building owned by the Company and used by both of its business segments. The Company also leases property at approximately 25 locations throughout the United States primarily for its field sales offices.
Note: All prior periods have been restated for discontinued operations resulting from the 2003 sale of Accountable Health Plans of America, Inc.
In a continued effort to improve new member enrollment and revenue, the Company rolled out new products and marketing campaigns during 2003 designed to be responsive to the changing needs of today's insurance consumers. In addition, the Company strengthened its distribution system by aligning its resources in markets with the greatest prospects for profitable growth and by providing sales agents with additional tools and support necessary to successfully market the Company's products. Customer service-related actions were also taken to improve retention of the Company's existing membership.
During the third quarter of 2003, the Company sold all of the outstanding common shares of its preferred provider organization network subsidiary, Accountable Health Plans of America, Inc. ("AHP") for $3.5 million. AHP contracted with more than 900 hospitals and 100,000 physicians in eight primary states: Arizona, Florida, Iowa, Nebraska, North Dakota, South Dakota, Texas and Wisconsin. Subject to the terms of the agreement, AHP will continue to provide network services to the Company for a minimum of five years. At the time of the sale, AHP served approximately 13% of the Company's members. Including the gain on the sale, income from discontinued operations was $0.7 million or $0.05 per diluted share for the twelve months ended December 31, 2003. The Company incurred a loss from discontinued operations of $0.7 million or $0.05 per diluted share in 2002 and a loss of $0.5 million or $0.04 per diluted share in 2001. All prior periods presented have been restated to exclude the results of discontinued operations and the amounts referred to in the foregoing and remainder of this discussion reflect the results of the Company's continuing operations.
The health segment loss ratio remained relatively stable, improving 20 basis points to 67.9% for 2003 compared to 68.1% for 2002. The health segment loss ratio is impacted by a variety of factors including claim cost trends, product pricing and the cost of litigation. The life segment, which represents less than 2% of the Company's premium revenue, experienced a favorable loss ratio at 23.6% for 2003 compared with 29.1% for 2002.
The expense ratio includes commissions, general and administrative expenses, premium taxes and assessments less other revenues. The health segment expense ratio improved to 27.5% in 2003 from 28.2% in 2002. The decrease from the prior year resulted from administrative cost containment actions taken in 2003 in a continued effort to keep costs in line with revenues. A lower number of employees in 2003 resulted in reduced compensation and related costs. Lower commissions also contributed to the improved health segment expense ratio.
The effective tax rate for 2003 was 37.6% compared to 39.4% for 2002. The effective tax rate in 2002 was higher due to the effect of non-deductible stock issuance expenditures incurred in 2002 and the effect of other permanent adjustments. The Company had deferred tax assets recorded, net of valuation allowances, of $2.4 million related to state net operating loss carryforwards at December 31, 2003, compared to $3.3 million at December 31, 2002. State net operating loss carryforwards begin to expire in 2008. Management believes that the deferred tax assets will be realized primarily through future taxable income and specified tax planning strategies.
The expense ratio includes commissions, general and administrative expenses, premium taxes and assessments less other revenues. The health segment expense ratio increased to 28.2% in 2002 from 27.5% in 2001. The increase from the prior year largely reflected the decrease in premium volume in 2002 compared to 2001. The change in the Company's product mix also contributed to the increase in the health segment expense ratio. MedOne(R) business has higher agent commissions and issue costs than small group products, but lower claim costs.
Interest expense on the outstanding balance of the Company's debt decreased to $1.8 million in 2002 from $2.9 million in 2001. The decrease in interest expense is largely due to a reduction in the amount of debt outstanding from $40.1 million at the end of 2001 to $33.9 million at the end of 2002. In addition, the interest rate charged on the outstanding balance on the Company's line of credit agreement is tied to the short-term borrowing rate, which declined throughout most of 2002.
Amortization of goodwill and other intangible assets was $0.7 million for 2002 compared to $3.6 million for the prior year. Effective January 1, 2002, the Company applied new accounting rules for goodwill and other intangible assets. See the Company's Notes to Consolidated Financial Statements, Note 2, "Adopted Accounting Standard" for a comprehensive discussion of the impact of this accounting standard.
On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement 142"). Statement 142 impacts the Company in two ways. First, goodwill is no longer amortized. Second, goodwill was subject to an initial impairment test in accordance with Statement 142, and the remaining balance of goodwill is subject to continuing impairment testing on an annual basis and between annual tests if an event occurs or circumstances change indicating a possible goodwill impairment. As a result of this initial impairment test, the Company recognized a non-cash goodwill impairment charge of $60.1 million. The impairment charge was recorded as a cumulative effect of a change in accounting principle as of January 1, 2002. The impairment charge had no impact on cash flows or the statutory-basis capital and surplus of the Company's insurance subsidiaries.
Management believes that the recorded liabilities for unpaid claims at December 31, 2003 is in the higher end of a reasonable range of outcomes. Management closely monitors and evaluates developments and emerging trends in claims costs to determine the reasonableness of judgments made. A retrospective test is performed on prior period claims liabilities and, as adjustments to the liabilities become necessary, the adjustments are reflected in current operations. Management believes that the amount of medical and other benefits payable is adequate to cover the Company's liabilities for unpaid claims as of December 31, 2003.
The Company's cash provided by operations was $20.1 million for 2003 and $35.2 million for 2002. At the end of 2002, the Company received a $7.5 million payment related to a pharmacy benefit management agreement. Also contributing to the lower level of operating cash flow in 2003 were prepaid maintenance fees related to the Company's technology modernization initiatives and a higher level of annual employee compensation payments.
Dividends paid by the insurance subsidiaries to the corporate parent may be limited by state insurance regulations. The insurance regulator in the insurer's state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior 12 months, exceeds the regulatory maximum, computed as the lesser of 10% of statutory capital and surplus or total statutory net gain from operations as of the end of the preceding calendar year. During 2003, regulatory approval was obtained and dividends paid to the parent company by an insurance subsidiary were $2.0 million in January 2003 and $11.0 million in December 2003. Based upon the financial statements of the Company's insurance subsidiaries as of December 31, 2003, as filed with the insurance regulators, the amount available for dividend without regulatory approval is $6.3 million until December 2004, when a dividend of $17.3 million can be paid without regulatory approval.
The National Association of Insurance Commissioners has adopted risk-based capital ("RBC") standards for life and health insurers designed to evaluate the adequacy of statutory capital and surplus in relation to various business risks faced by such insurers. The RBC formula is used by state insurance regulators as an early warning tool to identify insurance companies that potentially are inadequately capitalized. At December 31, 2003, each of the Company's insurance subsidiaries had RBC ratios substantially above the levels that would require Company or regulatory action.
Payments due by period ----------------------------------------------------- Less than More than (MILLIONS) Total 1 year 1-3 years 3-5 years 5 years - -------------------------------------------------------------------------------- Line of credit agreement $ 32.2 $ 0.9 $ 31.3 $ - $ - Operating leases 6.4 3.1 3.2 0.1 - Purchase obligations 5.0 3.7 1.3 - - - -------------------------------------------------------------------------------- Total $ 43.6 $ 7.7 $ 35.8 $ 0.1 $ - ================================================================================
In addition to the contractual obligations discussed above, the Company has a variety of other contractual agreements related to acquiring materials and services used in its operations. However, management believes these other agreements do not contain material non-cancelable commitments.
The primary investment objective of the Company is to maximize investment income while minimizing risks and preserving principal. The Company uses outside investment managers to manage its investment portfolio within the Company's investment guidelines. The Company seeks to meet its investment objectives through diversity of coupon rates, liquidity, investment type, industry, issuer, duration and geographic location. The Company manages credit risk by seeking to maintain high average quality ratings and by limiting investments in equity securities. At December 31, 2003, approximately 99% of the Company's total investment portfolio was invested in debt securities. The bond portfolio had an average quality rating of "AA" at December 31, 2003 and 2002, as measured by Standard & Poor's Corporation, and the Company held no below investment grade securities at December 31, 2003.
Almost the entire portfolio was classified as available for sale. At December 31, 2003 and 2002, the net unrealized gain on available for sale securities was $6.1 million and $7.6 million, respectively. The Company had no investments in mortgage loans, nonpublicly traded securities, real estate held for investment or financial derivatives.
The primary market risk affecting the Company is interest rate risk. Assuming an immediate increase of 100 basis points in interest rates, the net hypothetical decline in fair value of shareholders' equity is estimated to be $7.1 million after tax at December 31, 2003. This amount represents approximately 3% of the Company's shareholders' equity.
This report and other documents or oral presentations prepared or delivered by and on behalf of the Company contain or may contain "forward-looking statements" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements based upon management's expectations at the time such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those contemplated in the statements. Readers are cautioned not to place undue reliance on the forward-looking statements. When used in written documents or oral presentations, the terms "anticipate," "believe," "estimate," "expect," "may," "objective," "plan," "possible," "potential," "project," "will" and similar expressions are intended to identify forward-looking statements. In addition to the assumptions and other factors referred to specifically in connection with such statements, factors that could impact the Company's business and financial prospects include, but are not limited to, those discussed below and those discussed from time to time in the Company's various filings with the Securities and Exchange Commission or in other publicly disseminated written documents:
The Company estimates the costs of its future medical claims and other expenses using actuarial methods based upon historical data, medical inflation, product mix, seasonality, utilization of health care services and other relevant factors. The Company establishes premiums based on these methods. The premiums the Company charges its customers generally are fixed for one-year periods, and therefore, costs the Company incurs in excess of its medical claim projections generally are not recovered in the contract year through higher premiums. Certain factors may and often do cause actual health care costs to vary from what the Company estimated and reflected in premiums. These factors may include, but not be limited to: (1) an increase in the rates charged by providers of health care services and supplies, including pharmaceuticals; (2) higher than expected use of health care services by members; (3) the occurrence of bioterrorism, catastrophes or epidemics; (4) changes in the demographics of members and medical trends affecting them; and (5) new mandated benefits or other regulatory changes that increase the Company's costs. The occurrence of any of these factors, which are beyond the Company's control, could result in a material adverse effect on its business, financial condition and results of operations.
The Company's business is extensively regulated by federal and state authorities. Some of the new federal and state regulations promulgated under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, relating to health care reform require the Company to implement changes in its programs and systems in order to maintain compliance. The Company has incurred significant expenditures as a result of HIPAA regulations and expects to continue to incur expenditures as various regulations become effective.
The Company is subject to periodic changes in state laws and regulations regarding the selection and pricing of risks and other matters. New regulations regarding these issues could increase the Company's costs and decrease its premiums. The Company has in the past decided, and may in the future decide, to discontinue marketing its products in states that have enacted, or are considering, various health care reform regulations that would impair the Company's ability to market its products profitably.
Federal and state legislatures also are considering health care reform measures which may result in higher health insurance costs. Congress is considering legislation allowing small employers to form association health plans, exempt from state insurance regulations, which may impact the risk profile of employers willing to purchase insurance from the Company. In addition, the implementation of "prompt pay" laws, whereby a claim must be paid in a certain number of days regardless of whether it is a valid claim or not, subject to a right of recovery, may have a negative effect on the Company's results of operations.
REGULATORY COMPLIANCE. The Company's failure to comply with new or existing government regulation could subject it to significant fines and penalties.
The Company cannot predict with certainty the outcome of lawsuits against the Company or the potential costs involved.
Information processing is critical to the Company's business. The Company depends on its information system for timely and accurate information. The Company's failure to maintain an effective and efficient information system or disruptions in its information system could cause disruptions in its business operations, including any of the following: (1) failure to comply with prompt pay laws; (2) loss of existing members; (3) difficulty in attracting new members; (4) disputes with members, providers and agents; (5) regulatory problems; (6) increases in administrative expenses; and (7) other adverse consequences.
The Company is investing in an enterprise-wide information technology modernization project involving the purchase of software applications to support most of the Company's major processes. The design and development of the software applications began in early 2003, with a phased implementation scheduled over the next few years. Although the Company is taking measures to safeguard against disruptions to its information systems during this process, it cannot provide assurance that disruptions will not occur or that the project will be successfully implemented or implemented on schedule.
INDEPENDENT AGENT RELATIONSHIPS. The Company depends on the services of non-exclusive independent agents and brokers to market its products to potential customers. These agents and brokers frequently market the health insurance products of competitors as well as the Company's products. Most of the Company's contracts with agents and brokers are terminable without cause upon 30-days' notice by either party. The Company faces intense competition for the services and allegiance of independent agents and brokers. The Company cannot provide assurance that they will continue to market the Company's products in the future or that they will not refer the Company's members to competitors.
In addition, the health insurance industry, in general, has received negative publicity and does not have a positive public perception. This publicity and perception may lead to increased legislation, regulation, review of industry practices and private litigation. These factors may adversely affect the Company's ability to market its products and increase the regulatory burdens under which the Company operates, further increasing the costs of doing business and adversely affecting operating results.
INSURANCE RISK MANAGEMENT. If the Company's insurers or reinsurers do not perform their obligations or offer affordable coverage with reasonable deductibles or limits, the Company could experience significant losses.
The Company is dependent on the continued services of its management team, including its key executives. Loss of such personnel without adequate replacement could have a material adverse effect on the Company. Members of the Company's senior management have developed relationships with some of the Company's independent agents and brokers. If the Company is unable to retain these employees, the loss of their services could adversely impact the Company's ability to maintain relations with certain independent agents and brokers who market the Company's products. Additionally, the Company needs qualified managers and skilled employees with insurance industry experience to operate its businesses successfully. From time to time there may be shortages of skilled labor that may make it more difficult and expensive for the Company to attract and retain qualified employees. If the Company is unable to attract and retain qualified individuals or its costs to do so increase significantly, its operations could be materially adversely affected.
The Company's profitability could be adversely impacted by its inability to contract on favorable terms with networks of hospitals, physicians, dentists, pharmacies and other health care providers. The failure to secure cost-effective health care provider network contracts may result in a loss of membership or higher medical costs. In addition, the inability to contract with provider networks, the inability to terminate contracts with existing provider networks and enter into arrangements with new provider networks to serve the same market, and/or the inability of providers to provide adequate care, could adversely affect the Company's results of operations.
REGULATION LIMITING TRANSFER OF FUNDS. Regulations governing the Company's insurance subsidiaries could affect its ability to satisfy its obligations to creditors as they become due, including obligations under the Company's credit facility.
State regulations govern the amount of capital required to be retained in the Company's regulated insurance subsidiaries and the ability of those regulated subsidiaries to pay dividends. Those state regulations include the requirement to maintain minimum levels of statutory capital and surplus, including meeting the requirements of the risk-based capital standards promulgated by the National Association of Insurance Commissioners. State regulators have broad authority to take certain actions in the event those capital requirements are not met. Those actions could significantly impact the way the Company conducts its business, reduce its ability to access capital from the operations of its regulated insurance subsidiaries and have a material adverse effect on its results of operations and financial condition. Any new minimum capital requirements adopted in the future through state regulation may increase the Company's capital requirements.
American Medical Security Group, Inc., through its subsidiary companies (the "Company"), is a provider of individual and small employer group insurance products. The Company's principal product offerings are medical insurance for small employer groups and medical insurance marketed to individuals and their families ("MedOne(R)"). The Company also offers dental, life, prescription drug, disability and accidental death insurance, and provides self-funded benefit administration. The Company has two reportable segments: health insurance products (which accounted for approximately 98% of the Company's total premium revenues in 2003, 2002 and 2001) and life insurance products. The Company markets its products in 32 states and the District of Columbia through independent agents. At December 31, 2003, the Company's leading states with respect to medical membership were Illinois, Michigan, Florida and Texas, each individually representing approximately 10% of the Company's total medical membership. The Company has approximately 75 sales managers and representatives located in sales offices throughout the United States to support the independent agents. The Company has a relationship with a general agent who, along with affiliated subagents, generated approximately 9% of the Company's premium revenue in 2003. The Company's products generally provide discounts to members that utilize preferred provider organizations with which the Company contracts.
The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates are based on knowledge of current events and anticipated future events, and accordingly, actual results may differ from those estimates.
The Company evaluates securities for other-than-temporary impairment on a periodic basis and principally considers the type of security, the rating as determined by a nationally recognized securities rating organization, the severity of the decline in fair value and the duration of the decline in fair value in determining whether a security's decline in fair value is other than temporary. Realized gains and losses from the sale or write-down for other-than-temporary impairments of available-for-sale securities are calculated using the specific identification method.
The fair values of investments are reported in Note 5, "Investments." The fair values of all other financial instruments approximate their December 31, 2003 and 2002 carrying values.
Goodwill represents the excess of cost over the fair market value of net assets acquired. Effective January 1, 2002, goodwill is no longer amortized and is subject to impairment testing as a result of the adoption of a new accounting standard. See Note 2, "Adopted Accounting Standard" for a detailed discussion of the impact of this accounting standard. The Company completed its annual goodwill impairment test during the fourth quarter of 2003 and determined that its remaining balance of goodwill was not impaired as of December 31, 2003. Goodwill impairment tests are performed at least annually, and future goodwill impairments, if any, will be classified as operating expenses in the Company's statement of operations.
During 2003, the Company sold its preferred provider organization network subsidiary, Accountable Health Plans of America, Inc. ("AHP"). Goodwill associated with AHP of $708,000 was removed from the balance sheet in conjunction with the sale of the subsidiary. See Note 3, "Discontinued Operations" for further detail regarding the sale of this subsidiary and its affect on the Company's consolidated financial statements.
management believes that the amount of medical and other benefits payable is adequate to cover the Company's liability for unpaid amounts as of December 31, 2003.
Policy acquisition costs consist of commissions and other administrative costs that the Company incurs to acquire new business. The Company does not defer policy acquisition costs. Premium is collected and billed and commissions and other administrative costs are incurred on a month-to-month basis. Policy acquisition costs are expensed in the period incurred.
The Company limits the maximum net loss that can arise from certain lines of business by reinsuring (ceding) a portion of these risks with other insurance organizations (reinsurers) on an excess of loss basis. The Company's retention limit per covered life is $500,000 per policy year for medical claims and $50,000 for life claims. The Company also cedes, on a quota share basis, 100% of the risk on certain life policies to a prior affiliate in exchange for a ceding commission. The Company is liable on reinsurance ceded in the event that the reinsurers do not meet their contractual obligations.
Excess of loss reinsurance ceded: Insurance premiums $ 3,505 $ 2,049 $ 2,364 Medical and other benefits 4,969 1,715 1,720
Premiums for health and life policies are recognized ratably over the period that insurance coverage is provided. Other revenue, including administrative fee income from claim processing and other administrative services, is recognized in the period the service is provided.
In determining compensation expense in accordance with Statement 123, the fair value of options was estimated at the date of grant using the Black-Scholes option valuation model, which is commonly used in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility and the expected life of the options. Since the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Options to purchase 2,635,762, 2,922,492 and 3,243,767 shares of common stock were outstanding at December 31, 2003, 2002 and 2001, respectively. Of those shares, approximately 5,000, 162,000 and 1,914,000 were excluded
Paid related to: Current year 373,776 391,414 488,678 Prior years 110,181 117,748 120,300 - -------------------------------------------------------------------------------- Total paid 483,957 509,162 608,978 - --------------------------------------------------------------------------------
In determining the liability for unpaid claims at December 31, 2001, management anticipated increased utilization by the general population of mental health and other health care services in the fourth quarter of 2001 due to various factors including the indirect impact of the September 11, 2001 events and subsequent bio-terrorism threats and attacks. The Company did not experience a discernable adverse impact from these factors and events during 2002 or 2003, which accounts for the developed redundancy on the liability as of December 31, 2001. The reserves related to September 11, 2001 events are no longer held as of December 31, 2003 and 2002. The developed redundancy on the liability as of December 31, 2000 was due to an improvement as compared to previous years in the Company's average medical claims cost per member in late 2000. No additional premiums are collected or returned as a result of incurred claims from prior years.
The Company believes that all unrealized losses on individual securities are the result of normal price fluctuations due to market conditions and are not an indication of an other-than-temporary impairment. This determination is based upon the relatively small levels of losses and the fact that all securities are rated investment grade as determined by Standard & Poor's Corporation.
Current: Federal $ 14,213 $ 26,774 $ 5,602 State 245 1,682 249 - -------------------------------------------------------------------------------- 14,458 28,456 5,851 Deferred: Federal 1,320 (12,575) (335) State 280 (809) (342) Valuation allowance 1,143 10 1,286 - -------------------------------------------------------------------------------- 2,743 (13,374) 609 - -------------------------------------------------------------------------------- Income tax expense $ 17,201 $ 15,082 $ 6,460 ================================================================================
The Company is involved in various other legal and regulatory actions occurring in the normal course of business. Based on current information, including consultation with outside counsel, management believes any ultimate liability in excess of amounts reserved that may arise from the above-mentioned and all other legal and regulatory actions would not have a material adverse effect on the Company's consolidated financial position or results of operations. However, management's evaluation of the likely impact of these actions could change in the future and an unfavorable outcome could have a material adverse effect on the Company's consolidated financial position, results of operations or cash flow of a future period.
State insurance laws and regulations prescribe accounting practices for determining statutory net income and equity for insurance companies. These regulations require, among other matters, the filing of financial statements prepared in accordance with statutory accounting practices prescribed or permitted for insurance companies. The statutory capital and surplus of the Company's insurance subsidiaries, United Wisconsin Life Insurance Company and American Medical Security Insurance Company of Georgia, at December 31, 2003 and 2002, was $173,141,000 and $157,487,000, respectively. The combined statutory net income of the Company's insurance subsidiaries was $26,538,000, $13,150,000 and $18,052,000 for 2003, 2002 and 2001, respectively.
State insurance regulations also require the maintenance of a minimum compulsory surplus based on a percentage of premiums written. At December 31, 2003, the Company's insurance subsidiaries were in compliance with these compulsory regulatory requirements.
Dividends paid by the insurance subsidiaries to the parent Company are limited by state insurance regulations. The insurance regulator in the insurer's state of domicile may disapprove any dividend which, together with other dividends paid by an insurance company in the prior 12 months, exceeds the regulatory maximum, computed as the lesser of 10% of statutory capital and surplus or total statutory net gain from operations as of the end of the preceding calendar year. During 2003, regulatory approval was obtained and dividends paid to the parent company by an insurance subsidiary were $2,000,000 in January 2003 and $11,000,000 in December 2003. Based upon the financial statements of the Company's insurance subsidiaries as of December 31, 2003, as filed with the insurance regulators, the amount available for dividend without regulatory approval is $6,300,000 until December 2004, when a dividend of $17,300,000 can be paid without regulatory approval.
The Company has a nonqualified executive retirement plan (the "Nonqualified Plan") to provide key management with the opportunity to accumulate deferred compensation which cannot be accumulated under the Retirement Savings Plan due to compensation limitations imposed by the Internal Revenue Service. The Nonqualified Plan is funded through a rabbi trust and has contribution and investment options similar to those of the Retirement Savings Plan. The Company recognized expense associated with the Nonqualified Plan of $111,000, $116,000 and $53,000 during 2003, 2002 and 2001, respectively.
The terms of incentive stock options and nonqualified stock options granted under the Plan cannot exceed more than 10 and 12 years, respectively, and the option exercise price generally cannot be less than the fair market value of the Company's common stock on the date of grant. The exercise price equaled the fair market value of the Company's common stock at the date of the grant for all of the Company's stock option grants. Incentive stock options and NQSOs are not exercisable in any event prior to six months following the grant date. The Company's outstanding NQSOs generally vest 25% per year for employees and 33.3% per year for directors beginning on the first anniversary of the date of grant and each subsequent anniversary date thereafter provided the employee or director remains in service.
The Company has a deferred compensation plan for the benefit of outside directors of the Company who wish to defer the receipt of eligible compensation which they may otherwise be entitled to receive from the Company. Directors who choose to participate in the plan may elect to have their deferred compensation credited to, in whole or in part, either an interest account or a Company stock unit account.
During 1998, the Company and a key executive entered into a deferred stock agreement. Under the agreement the Company has an obligation to issue 73,506 shares of the Company's common stock in the year after employment terminates. As the vesting requirements under this agreement were fully satisfied during 2002, the Company did not incur any expenses related to this agreement in 2003. In 2002 and 2001, expenses of $197,000 and $225,000, respectively, were incurred related to this agreement.
On July 9, 2001, the Company and a key executive entered into a restricted stock agreement. Under the agreement, the Company granted the executive 25,000 shares of common stock, subject to certain rights and restrictions, in exchange for the surrender or cancellation of 443,857 shares of the executive's nonqualified stock options. The 25,000 shares of restricted stock vested in December 2001 upon the occurrence of certain triggering events, as specified under the restricted stock agreement. The Company incurred expense of $139,000 during 2001 related to this agreement.
The Company has two reportable segments: 1) health insurance products; and 2) life insurance products. The Company's health insurance products consist of the following coverages related to small group PPO products: MedOne(R) and small group medical, self-funded medical, dental and short-term disability. Life products consist primarily of group term life insurance. The "All Other" category includes operations not directly related to the business segments and unallocated corporate items (i.e., corporate investment income, interest expense on corporate
debt, amortization of goodwill and intangibles and unallocated overhead expenses). The reportable segments are managed separately because they differ in the nature of the products offered and in profit margins.