The following discussion provides management's assessment of financial results and material changes in financial position for the Company. For a better understanding of this analysis, reference should be made to Item 1 - Business and to Item 8 - Financial Statements and Supplementary Data. Certain reclassifications of prior years' amounts have been made to conform with the 1997 presentation.
The Company derives its revenue primarily from premiums and fees from its accident and health insurance products and, to a significantly lesser extent, from commission, service, and investment income. The product lines currently marketed and underwritten by the Company's insurance subsidiaries are Medical Expense products and Specified Disease products. Medical Expense products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of medicines. Specified Disease products include indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and "event specific" policies, which provide fixed benefits or lump sum payments upon diagnoses of certain types of internal cancer or other catastrophic diseases. Historically, the Company's insurance subsidiaries have also underwritten a significant amount of Medicare Supplement products. The underwriting of Medicare Supplement products was curtailed due to the relatively low margins for these products. Commission and service income is generated from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions received by the Company for sales of insurance products underwritten primarily by unaffiliated managed care organizations (such sales have been significantly curtailed).
Overview. Income before income taxes for the year ended December 31, 1999 was $4.0 million compared to losses before income taxes of $22.0 million and $109.4 million for the years ended December 31, 1998 and 1997, respectively. The favorable trend in pre-tax income was attributable to:
* Non-recurring items expensed during 1998 and 1997 that were eliminated with the Company's reorganization in 1999. Non-recurring items include interest expense on retired/canceled debt and reorganization expenses.
* The recognition of income relative to the resolution of preconfirmation contingencies. (See Note 2 of the Notes to the Consolidated Financial Statements.)
The following narratives discuss the principal components of insurance operating results and net investment income.
Premiums. Premiums, in thousands, for each major product line are set below for the year ended December 31:
Pro Forma Ascent Westbridge ============== ============================= 1999 1998 1997 ============== ============= ============ Medical Expense: First-year $ 15,863 $ 15,821 $ 26,972 Renewal 39,891 48,888 48,792 ------------ ------------ ------------ 55,754 64,709 75,764 ------------ ------------ ------------ Specified Disease: First-year 1,352 1,818 1,959 Renewal 27,917 30,546 31,128 ------------ ------------ ------------ 29,269 32,364 33,087 ------------ ------------ ------------ Medicare Supplement: First-year 34 1,477 8,763 Renewal 30,526 36,554 42,652 ------------ ------------ ------------ 30,560 38,031 51,415 ------------ ------------ ------------
Consolidated Premium Revenue $ 116,319 $ 135,717 $ 161,097 ============ ============ ============
Total premium revenue decreased $19.4 million (or 14.3%) for 1999 as compared to 1998 due to decreases in first year and renewal premiums of $1.7 million (or 8.8%) and $17.7 million (or 15.2%), respectively. The decrease in first year premiums was primarily attributable to the Company discontinuing sales of the Medicare Supplement product line. The cancellation of unprofitable blocks of business and decreased persistency resulting from the implementation of rate increases on less profitable blocks of business resulted in the decline in renewal premiums.
For 1998, benefits and claims as a percent of premium decreased 11.7 percentage points from 1997. The decrease was attributable to the significant claim reserve additions during 1997 resulting from substantial increases in paid claims experience on certain Medical Expense and Medicare Supplement products.
Commissions as a percent of premium increased 1998 over 1997 due to a decrease in the amounts of commissions deferred and therefore, an increase in the amounts expensed on a current basis.
Net Investment Income. Net investment income decreased $2.7 million (or 22.6%) for 1999 as compared to 1998 due to a 16.2% decrease in invested assets and decreased interest income from agent receivables. Invested assets decreased as a result of payments of reorganization costs and the reduction of premiums received as a result of the elimination of unprofitable blocks of business.
For 1998, investment income increased $1.0 million (or 9.0%) from 1997 due to increases in interest income from agent receivables.
(1) Excludes interest on receivables from agents of $1.3 million, $2.5 million, and $1.6 million for the years ended December 31, 1999, 1998 and 1997, respectively.
(1) Ratings are the lower of those assigned primarily by Standard & Poor's and Moody's, when available, and are shown in the table using the Standard & Poor's rating scale. Unrated securities are assigned ratings based on the applicable NAIC designation or the rating assigned to comparable debt outstanding of the same issuer. NAIC 1 fixed maturity securities have been classified as "A" and NAIC 2 fixed maturity securities have been classified as "BBB".
Reserve Policy. The Company's reserves consist of two separate components: claim reserves and policy benefit reserves. Claim reserves are established by the Company for benefit payments which have already been incurred by the policyholder but which have not been paid by the Company. The Company's consulting actuary estimates these reserves based upon an analysis of claim inventories, loss ratios and historical claim payment studies. These estimates are developed in the aggregate for claims incurred (whether or not reported).
Policy benefit reserves are established by the Company for benefit payments that have not been incurred but which are estimated to be incurred in the future. The policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the Company's expected future policyholder benefits minus the discounted present value of its expected future net premiums. These present value determinations are based upon assumed fixed investment yields, the age of the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. Except for purposes of reporting to insurance regulatory authorities and for tax filing, the Company's claim reserves and policy benefit reserves are determined in accordance with generally accepted accounting principles ("GAAP").
Because the discount factor used in calculating the Company's policy benefit reserves is based upon the rate of return of the Company's investments designed to fund this reserve, the amount of the reserve is dependent upon the yield on these investments. Provided that there is no material adverse experience with respect to these benefits, changes in future market interest rates will not have an impact on the profitability of policies already sold. Because fluctuations in future market interest rates affect the Company's yield on new investments, they also affect the discount factor used to establish, and thus the amount of, its policy benefit reserves for new sales. In addition, because an increase in the policy benefit reserves in any period is treated as an expense for income statement purposes, market interest rate fluctuations can directly affect the Company's profitability for policies sold in such period. It is not possible to predict future market interest rate fluctuations.
In accordance with GAAP, the Company's actuarial assumptions are generally fixed, and absent materially adverse benefit experience, they are not generally adjusted. The Company monitors the adequacy of its policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of the Company's policy benefit reserves may also be impacted by the development of new medicines and treatment procedures which may alter the incidence rates of illness and the treatment methods for illness and accident (such as out-patient versus in-patient care) or prolong life expectancy. Changes in coverage provided by major medical insurers or government plans may also affect the adequacy of the Company's reserves if, for example, such developments had the effect of increasing or decreasing the incidence rate and per claim costs of occurrences against which the Company insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the Company needing to post additional reserves, which could have a material adverse effect upon its business, financial condition or results of operations.
The Company's Insurance Subsidiaries are required to report their results of operations and financial position to state regulatory agencies based upon statutory accounting practices ("SAP"). Under SAP, certain assumptions used in determining the policy benefit reserves, such as claim costs and investment result assumptions, are often more conservative than those appropriate for use by the Company under GAAP. In particular, SAP interest rate assumptions for investment results are fixed by statute and are generally lower than those used by the Company under GAAP. Another significant difference is that under SAP, unlike GAAP, the Company is required to expense all sales and other policy acquisition costs as they are incurred rather than capitalizing and amortizing them over the expected life of the policy. The effect of this requirement is moderated by the allowance under SAP of an accounting treatment known as the "two year preliminary term" reserve valuation method. This reserve method allows the Company to defer any accumulation of policy benefit reserves until after the second policy year. The immediate charge off of sales and acquisition expenses and the sometimes conservative claim cost and other valuation assumptions under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce the Company's gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividend distributions from the Insurance Subsidiaries. See ITEM 7 "Liquidity, Capital Resources and Statutory Capital and Surplus - The Company."
Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile, see Item 1 - Business - Regulations. NFL, a Delaware domestic company, is precluded from paying dividends in 2000 without the prior approval of the Delaware Insurance Commissioner, as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. NFIC and AICT, Texas domestic companies, are also precluded from paying dividends during 2000 without the prior approval of the Texas Insurance Commissioner as both companies earned surplus is negative. FLICA, a Mississippi domestic company, is precluded from paying dividends during 2000 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ended December 31, 1999.
Insurance Subsidiaries. The primary sources of cash for the Insurance Subsidiaries are premiums and income on invested assets. Additional cash is periodically provided by capital contributions from the Company (see "The Company" discussion above) and from the sale of short-term investments and could, if necessary, be provided through the sale of long-term investments and blocks of business. The Insurance Subsidiaries' primary uses for cash are benefits and claims, commissions, general and administrative expenses, and taxes, licenses and fees.
The Company finances the majority of its obligations to make commission advances through Ascent Funding Corporation ("AFI"), an indirect wholly owned subsidiary of Ascent. On June 6, 1997, AFI entered into a Credit Agreement (the "Credit Agreement") with LaSalle National Bank ("LaSalle"). This Credit Agreement provided AFI with a three-year, $20.0 million revolving loan facility (the "Receivables Financing"), the proceeds of which are used to purchase agent advance receivables from the Insurance Subsidiaries and certain affiliated marketing companies. AFI's obligations under the Credit Agreement are secured by liens upon substantially all of AFI's assets. In August 1999, the Company amended the Credit Agreement which reduced the revolving loan facility to a $7.5 million facility. In connection with this commission advancing program, at December 31, 1999, the Company's net receivables from subagents totaled approximately $7.1 million and approximately $3.9 million was outstanding under the Credit Agreement. The Credit Agreement terminates on June 5, 2001, at which time the outstanding principal and interest thereunder will be due and payable.
* the effect of economic and market conditions * further adverse developments with respect to the Company's liquidity position or operations of the Company's various businesses * actions that may be taken by insurance regulatory authorities * adverse developments in the timing or results of the Company's current strategic business plan * the difficulty in controlling health care costs and integrating new operations * the ability of the Company to realize anticipated general and administrative expense savings and overhead reductions from system replacement initiatives * the ability of management to return the Company's operations to profitability * and the possible negative effects of prospective health care reform.
To the Board of Directors and Stockholders of Westbridge Capital Corp. (now, Ascent Assurance, Inc.)
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Westbridge Capital Corp. and its subsidiaries at December 31, 1998 and the results of their operations and their cash flows for the three months ended March 31, 1999 and for each of the two years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules 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 audits of these statements in accordance with auditing standards generally accepted in the United States, 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 audits provide a reasonable basis for the opinion expressed above.
Amortization of deferred policy acquisition costs 1,478 Additions to deferred policy acquisition costs (5,832) Decrease in receivables from agents 1,120 Increase in other assets (1,061) Increase in policy liabilities and accruals 89 Decrease in accounts payable and accruals (4,949) Decrease in deferred income taxes, net 261 Other, net 1,707 ------------------- Net Cash Used For Operating Activities (5,081) -------------------
Cash Flows From Investing Activities: Proceeds from investments sold: Fixed maturities, called or matured 1,132 Fixed maturities, sold 17,096 Other investments, sold or matured 873 Cost of investments acquired (9,001) Property and equipment purchased (4,193) ------------------- Net Cash Provided By Investing Activities 5,907 -------------------
* To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of December 10, 1998, 8,090 shares of New Preferred Stock which, together with the 15,167 additional shares of New Preferred Stock purchased by the CSFB Affiliate as described above, are convertible into 4,765,165 shares of the New Common Stock. As a result of the New Preferred Stock received by the CSFB Affiliate, together with the 3,093,998 shares of New Common Stock received by the CSFB Affiliate in respect of the Convertible Notes owned by CSFB, the CSFB Affiliate beneficially owns approximately 56.6% of the New Common Stock on an as converted basis, assuming the exercise of all New Warrants and issuance of New Common Stock reserved under the 1999 Stock Option Plan as discussed below. The New Preferred Stock has a stated value of $1,000 per share and a cumulative annual dividend rate of $102.50 per share payable in January of each year in cash or by the issuance of additional shares of New Preferred Stock. The New Preferred Stock is convertible at any time into 204.8897 shares of New Common Stock at an initial conversion price of $4.88 per share of New Common Stock, subject to customary anti-dilution adjustments.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted number of shares of New Common Stock issued and outstanding on the Effective Date are reserved for issuance to employees and directors, and up to 387,119 shares, or 3%, of the fully diluted number of shares of New Common Stock issued on the Effective Date are reserved for issuance to the Company's marketing agents under the Company's 1999 Stock Option Plan, which was approved by the Company's shareholders.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES INCLUDING FRESH START ACCOUNTING PRINCIPLES EFFECTIVE MARCH 31, 1999 FOR ASCENT
Fresh Start Adjustments. In accordance with the American Institute of Certified Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company adopted fresh start reporting effective March 31, 1999. Fresh start reporting requires the new reporting entity created on the reorganization effective date to determine a reorganization book value. The reorganization book value is allocated to the fair value of assets and liabilities similar to the purchase method of accounting under Accounting Principles Board Opinion No. 16. As a result of the application of fresh start reporting, the financial statements of Ascent issued subsequent to the adoption of fresh start reporting will not be comparable with those of Westbridge prepared before adoption of fresh start accounting, including the historical financial statements of Westbridge in this annual report. With the adoption of fresh start accounting, the Company retained a fiscal accounting year ended on December 31 of each year.
The effects of the Plan and fresh start reporting on the Company's consolidated balance sheet as of March 31, 1999 are as follows (in thousands):
(a) Reflects issuance of 23,257 shares of New Preferred Stock to CSFB for $15.2 million in cash and exchange of Senior Notes held by CSFB, including accrued interest, for $8.1 million. Includes simultaneous retirement of Senior Notes held by holders other than CSFB, including accrued interest, for $15.2 million and write-off of unamortized debt discount of $0.5 million.
Deferred Policy Acquisition Costs ("DPAC"). Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Also included in DPAC is the cost of insurance purchased on acquired business. The amortization of these costs is based on actuarially estimated future premium revenues, and the amortization rate is adjusted periodically to reflect actual experience. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits. No changes were made to DPAC assumptions for purposes of fresh start accounting.
Federal Income Taxes. The Company records income taxes based on the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded when such differences arise. A valuation allowance, reducing any recognized deferred tax asset, must be recorded if it is determined that it is more likely than not that such deferred tax asset will not be realized. The deferred tax asset at December 31, 1999 is net of a valuation allowance of approximately $16.9 million related principally to net operating loss carryforwards ("NOLs") of Ascent's operating subsidiaries.
Diluted: Income available to common shareholders $ 232 ================= Weighted average shares outstanding 6,510 ================= Diluted earnings per share $ 0.04 =================
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. The insurance departments of the states of domicile of the Company's insurance subsidiaries have adopted the Codification effective January 1, 2001. The Company does not expect the Codification to materially impact statutory surplus.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement is effective for fiscal years beginning after June 15, 2000. The pronouncement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As the Company has not participated in derivative or hedging activities, the Company's financial statements are not effected by SFAS 133.
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 1999, are shown below, in thousands, summarized by year to contractual maturity. Mortgage-backed securities are listed separately. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Included in fixed maturities at December 31, 1999 and 1998, are high-yield, unrated or less than investment grade corporate debt securities comprising less than 1.3% and 3.2% of total cash and invested assets at December 31, 1999 and 1998, respectively.
Investment securities on deposit with insurance regulators in accordance with statutory requirements at December 31, 1999 and 1998 had a par value totaling $27.3 million and $28.2 million, respectively. At December 31, 1999 and 1998, the Company had restricted cash and investments totaling $2.6 million and $2.5 million, respectively, related to its receivables financing program (see NOTE 5 "Financing Activities").
Mortality Issues through 1980 use the 1955-1960 Ultimate Table; issues subsequent to 1980 through 1992 use the 1965-1970 Ultimate Table. 1993 and later issues use the 1975-1980 Ultimate Table. Policies acquired in acquisitions use the 1965-1970 Ultimate Table.
AFI's obligations under the Credit Agreement have been guaranteed by Ascent (the "Guaranty Agreement"), and the Company has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL and NFIC as collateral for that guaranty. As of December 31, 1999, there were no events of default under the Guaranty or Credit Agreements, which were amended to reflect the recapitalization of the Company.
In July 1999, Ascent Management, Inc. ("AMI") entered into a $3.3 million term loan agreement with LaSalle, secured by substantially all of AMI's assets and the guarantee of Ascent. Principal is payable in 60 equal monthly installments beginning January 31, 2000. Interest of $98,000 was expensed and paid in 1999.
Accrued but unpaid interest on the Senior Notes through the Petition Date was approximately $2.1 million. The Plan required the continued accrual of interest on the Senior Notes from the Petition Date to the Effective Date. Accrued but unpaid interest on the Senior Notes from the Petition Date to December 31, 1999 totaled approximately $0.6 million. Contractual interest continued to accrue at a rate of $6,111 per day from January 1, 1999 through the Effective Date.
Convertible Notes. During the second quarter of 1997, the Company completed the sale of $70.0 million aggregate principal amount of its Convertible Notes, due 2004, in an underwritten public offering. Contractual interest on the Convertible Notes was payable in semi-annual installments on May 1 and November 1 of each year, commencing November 1, 1997. In November 1997, the Company suspended the scheduled interest payments on these Convertible Notes. At the Petition Date, approximately $7.3 million of unpaid interest was accrued. The Company did not accrue interest on its Convertible Notes after the Petition Date as it was unlikely such interest would be paid under the Plan. The amount of contractual interest that would have otherwise been accrued from the Petition Date to December 31, 1998 totaled $2.7 million, and such contractual interest would have continued to accrue at $14,583 per day from January 1, 1999 until the Effective Date.
Total interest paid on debt in 1998 and 1997 was $0.8 million and $3.0 million, respectively.
The following table provides a reconciliation of the beginning and ending claim reserve balances, on a gross-of-reinsurance basis, for 1999, 1998 and 1997, to the amounts reported in the Company's balance sheet:
New Preferred Stock. On March 24, 1999, pursuant to the Plan, the Company authorized 40,000 shares of non-voting New Preferred Stock, of which 23,257 shares are owned by CSFB (See NOTE 1).
Effective January 31, 2000, the Company declared a dividend in the amount of $1,873,965 on preferred stock. The dividend was accrued at December 31, 1999 and paid through the issue of 1,873 additional shares of preferred stock and a $965 distribution of cash.
Prior to the Effective Date of the Plan (see NOTE 1), the Company had the following preferred stock outstanding:
On April 12, 1994, the Company issued 20,000 shares of Old Preferred Stock, at a price of $1,000 per share. The Old Preferred Stock was issued in a private placement and was subsequently registered with the Securities and Exchange Commission under a registration statement, which was declared effective in October 1994. The terms of the Old Preferred Stock included a cumulative annual dividend rate of 8.25%, subject to increase to 9.25%, upon non-compliance by the Company with certain restrictions.
Taxes paid in 1999, 1998 and 1997 were $80,000, $1.1 million and $118,000, respectively. The Company and its wholly owned subsidiaries, other than NFIC, AICT and FLICA, file a consolidated federal income tax return. NFIC, AICT and FLICA file separate federal income tax returns.
Under the provisions of pre-1984 life insurance tax regulations, NFL was taxed on the lesser of taxable investment income or income from operations, plus one-half of any excess of income from operations over taxable investment income. One-half of the excess (if any) of the income from operations over taxable investment income, an amount which was not currently subject to taxation, plus special deductions allowed in computing the income from operations, were placed in a special memorandum tax account known as the policyholders' surplus account. The aggregate accumulation in the account at December 31, 1999, approximated $2.5 million. Federal income taxes will become payable on this account at the then current tax rate when and to the extent that the account exceeds a specific maximum, or when and if distributions to stockholders, other than stock dividends and other limited exceptions, are made in excess of the accumulated previously taxed income. The Company does not anticipate any transactions that would cause any part of the amount to become taxable and, accordingly, deferred taxes which would approximate $0.9 million have not been provided on such amount.
At December 31, 1999 and 1998, NFL has approximately $8.0 million and $7.8 million in its shareholders surplus account from which it could make distributions to the Company without incurring any federal tax liability. The amount of dividends which may be paid by NFL to the Company is limited by statutory regulations.
Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance departments of their respective state of domicile. NFL, a Delaware domestic company, may not declare or pay dividends from any source other than earned surplus without the Delaware Insurance Commissioner's approval. The Delaware Insurance Code defines earned surplus as the amount equal to the unassigned funds as set forth in NFL's most recent statutory annual statement including surplus arising from unrealized gains or revaluation of assets. Delaware insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. During 1999, NFL is precluded from paying dividends without the prior approval of the Delaware Insurance Commissioner as its earned surplus is negative. Further, NFL has agreed to obtain prior approval for any future dividends. Effective March 31, 1999, the Delaware Department of Insurance approved a quasi - reorganization of the Company's surplus. Under the reorganization, the Company's unassigned surplus deficit of $36,446,154 was eliminated. Likewise, the Company's gross paid in and contributed surplus decreased by an equal amount.
NFIC and AICT, Texas domestic companies, may make dividend payments from surplus profits or earned surplus arising from its business. The Texas Insurance Code defines earned surplus as unassigned surplus excluding any unrealized gains. Texas life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold is considered extraordinary and requires prior approval of the Texas Insurance Commissioner. NFIC's and AICT's earned surplus is negative, and as such, each company is precluded from paying dividends during 1999 without the prior approval of the Texas Insurance Commissioner.
FLICA, a Mississippi domestic company, may make dividend payments only from its actual net surplus computed as required by law in its statutory annual statement. Mississippi life insurance companies may generally pay ordinary dividends or make distributions of cash or other property within any twelve month period with a fair market value not exceeding the lesser of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Any dividend exceeding the applicable threshold amount requires prior approval of the Mississippi Insurance Commissioner. FLICA is precluded from paying dividends to NFL during 1999 without the prior approval of the Mississippi Insurance Commissioner as it recorded a net loss from operations for the year ending December 31, 1999.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health Insurers Model Act ("the Model Act"). The Model Act provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory attention. The Model Act (or similar legislation or regulation) has been adopted in states where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention, varying with the ratio of the insurance company's total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its risk-based capital ("RBC"). If a company's total adjusted capital is less than 100 percent but greater than or equal to 75 percent of its RBC, or if a negative trend (as defined by the NAIC) has occurred and total adjusted capital is less than 125 percent of RBC (the "Company Action Level"), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions. If a company's total adjusted capital is less than 75 percent but greater than or equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed. If a company's total adjusted capital is less than 50 percent but greater than or equal to 35 percent of its RBC (the "Authorized Control Level"), the regulatory authority may take any action it deems necessary, including placing the company under regulatory control. If a company's total adjusted capital is less than 35 percent of its RBC (the "Mandatory Control Level"), the regulatory authority must place the company under its control. The NAIC's requirements are effective on a state by state basis if, and when, they are adopted by the regulators in the respective states. The Insurance Departments of the States of Delaware and Mississippi have each adopted the NAIC's Model Act. At December 31, 1999, total adjusted capital for NFL, a Delaware domiciled company, and FLICA, a Mississippi domiciled company, exceeded the respective Company Action Levels.
1999 Stock Option Plan. Pursuant to the Plan (see NOTE 1), on March 24, 1999, the Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999 Plan") in order to further and promote the interest of the Company, its subsidiaries and its shareholders by enabling the Company and its subsidiaries to attract, retain and motivate employees, non-employee directors and consultants (including marketing agents) or those who will become employees, non-employee directors and consultants (including marketing agents), and to align the interests of those individuals and the Company's shareholders. To do this, the 1999 Plan offers equity-based opportunities providing such employees and consultants with a proprietary interest in maximizing the growth, profitability and overall success of the Company and its subsidiaries.
If the fair value of the stock compensation granted had been accounted for under FAS 123, the pro forma net loss for the nine months ended December 31, 1999 would have been ($347,089), or ($0.05) per basic share or ($0.05) per diluted share. For purposes of pro forma disclosure, the estimated fair value of the stock compensation is amortized to expense over the stock's vesting period. The effect on net income of the stock compensation amortization for the year presented above is not likely to be representative of the effects on reported net income for future years.
The following table summarizes information about the stock options outstanding at December 31, 1999:
Weighted Average Remaining Exercise Number Contractual Weighted Average Prices Outstanding Life Exercise Price - ---------- ------------- ----------------- -------------------- $0.01 335,700 9.25 $0.01 $3.00 135,000 2.25 $3.00 $4.39 626,050 9.25 $4.39 ------------- ------------------ -------------------- 1,096,750 8.39 $2.88 ============= ================== ====================
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on both life and accident and health business. Reinsurance agreements are used to limit maximum losses and provide greater diversity of risk. The Company remains liable to policyholders to the extent the reinsuring companies are unable to meet their treaty obligations. Total accident and health premiums of $2.6 million, $2.8 million, and $3.6 million, were paid to reinsurers in 1999, 1998, and 1997, respectively. Face amounts of life insurance in force approximated $31.7 million, $37.5 million, and $53.1 million at December 31, 1999, 1998 and 1997, respectively. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance whereby NFL cedes claims in excess of $25,000 per year. Premiums of $13,706 and $22,046 were paid to the reinsurer for the year ended December 31, 1999 and 1998, respectively. No other life insurance products were reinsured during 1999, 1998 or 1997.
Stockholders' Equity: Common stock 65 65 Capital in excess of par value 27,338 27,038 Accumulated other comprehensive loss, net of tax (3,851) - Retained Earnings 232 - --------------- -------------
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity $ 54,433 $ 53,193 =============== =============
Assets: Cash $ 482 Short-term investments 503 Fixed maturities, at market value 10,433 Equity securities, at market value 1,010 Investment in consolidated subsidiaries 39,584 Accrued investment income 213 Other assets 3,088 --------------------- Total Assets $ 55,313 ===================== Liabilities: Senior subordinated notes, net $ 19,523 Convertible subordinated notes 70,000 Interest and dividends payable 11,315 Other liabilities 4,620 --------------------- Total Liabilities 105,458 ---------------------
Net investment income $ 509 Realized losses on investments (376) Intercompany income derived from: Interest on Surplus Certificates 58 Interest on advances to subsidiaries 22 Other income 3 -------------------- --------------------
Resolution of preconfirmation contingencies (1,235) General and administrative expenses (237) Taxes, licenses and fees (1) Interest expense - -------------------- (1,473) -------------------- Income before income taxes and equity in undistributed net earnings of subsidiaries 1,689 Provision for income taxes (629) -------------------- 2,318 Equity in undistributed net loss of Subsidiaries (212) --------------------
Cash Flows From Financing Activities: Net Cash Provided By Financing Activities - --------------------- Increase in Cash during the period 3,369 Cash at beginning of period 658 ===================== Cash at end of period $ 4,027 =====================