In December 2001, we signed a promissory note and mortgage due December 31, 2011, with a current outstanding principal amount of $6.6 million at December 31, 2003, used to finance our home office building consisting of 56,000 square
feet and located at 10689 North Pennsylvania Street, Indianapolis, Indiana. Approximately 43,000 square feet of the building is leased to Standard Life pursuant to a lease agreement entered into on December 28, 2001. The remaining space is used by Standard Management and U.S. Health Services.
U.S. Health Services leases approximately 30,000 square feet in an office building located at 6210 N. Technology Center Drive, Indianapolis, Indiana. The lease expires April 2007.
All statements, trend analyses, and other information contained in this Annual Report on Form 10-K or any document incorporated by reference herein relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend” and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, but are not limited to:
Our ability to achieve anticipated levels of operational efficiencies at recently acquired companies, as well as through other cost-saving initiatives.
Earnings from products accounted for as insurance policy liabilities are primarily generated from the excess of net investment income earned over the interest credited to the policyholder, or the “investment spread”. Our investment spread is summarized as follows as of December 31:
Our profitability depends in large part upon the amount of assets under our management, investment spreads we earn on our policyholders’ account balances, our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes, defaults or impairment of assets, our ability to manage costs of the options purchased to fund the interest credits on our index annuities, our ability to manage the costs of acquiring new business (principally commissions to agents and first year bonuses credited to policyholders) and our ability to manage our operating expenses.
The weighted average effective credited rate represents interest on interest sensitive liabilities, including equity indexed annuities, offset by gains on call option assets used to hedge equity indexed annuity liabilities.
Rising interest rates result in a decline in the market value of assets, and also tend to result in increased policyholder surrenders as other investment options become relatively more attractive. The effect of increased surrenders is to reduce earnings over the long term. Current period earnings effect may vary depending on the level of surrender charges and deferred policy acquisition costs, or DAC, and present value of future profits, or PVFP. In addition, increasing interest rates give rise to disintermediation risk, the risk that assets must be sold at depressed values in order to fund increased surrender payments. This risk is mitigated by properly matching assets and liabilities.
The average expected remaining life of Standard Life’s traditional life and annuity business in force at December 31, 2003 was 7.2 years. This calculation was determined based upon our actuarial models and assumptions as to expected persistency and mortality. Persistency is the extent to which insurance policies sold are maintained by the insured. The persistency of life insurance and annuity products is a critical element of their profitability. However, a surrender charge often applies in the early contract years and declines to zero over time.
Life insurance policyholders sometimes do not pay premiums, thus causing their policies to lapse. For the years 2003, 2002 and 2001 Standard Life experienced total policy lapses, excluding surrenders, of 3.1%, 3.4% and 3.7% of total
policies in force at December 31 of each year, respectively. Ongoing premiums are not required for annuity policies, so annuities do not experience policy lapses.
After purchase, amortization of the asset occurs in proportion to profits emerging from the purchased policies. The asset is amortized over the expected life of the block of business. The percentages of expected net amortization of the beginning balance of the total PVFP asset as of December 31, 2003 are expected to be between 9% and 14% in each of the years 2004 through 2008.
Costs relating to the acquisition of new business, primarily commissions paid to agents, which vary with and are directly related to the production of new business, are deferred to the extent that such costs are recoverable from future profit margins. At the time of issuance, the acquisition expenses, approximately 10% of our initial annuity premium deposits are capitalized as DAC. In accordance with SFAS No. 97, DAC with interest is amortized over the lives of the policies in a constant relationship to the present value of estimated future gross profits.
Immediate annuities with payments contingent on the survival of the annuitant are accounted as limited-payment contracts in accordance with FAS No. 60, with revenue recognition, expense recognition, and liabilities computed as described above for traditional life products.
The combined balance of our DAC and PVFP was $182.9 million. The recovery of these costs is dependent on the future profitability of the related business at December 31, 2003.
The assumptions we use to amortize and evaluate the recoverability of the DAC and PVFP involve significant judgment. A significant revision to these assumptions will impact future financial results. We recorded a charge of $7.9 million and $7.8 million for 2003 and 2002, respectively, related to the acceleration of DAC amortization due to DAC unlocking.
Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax basis of assets and liabilities and capital loss carryforwards. We have gross deferred income tax assets of $60.2 million at December 31, 2003. In assessing the realization of our deferred income tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred income tax assets depends upon generating future taxable income during the periods in which our temporary differences become deductible and capital gains before our capital loss carryforwards expire. We evaluate the recoverability of our deferred income tax assets by assessing the need for a valuation allowance on a quarterly basis. If we determine that it is more likely than not that our deferred income tax assets will not be recovered, a valuation allowance will be established against some or all of our deferred income tax assets. This could have a significant effect on our future results of operations and financial position.
carryforwards. Differences between forecasted and actual future operating results could adversely impact our ability to realize our deferred income tax assets.
We calculate and maintain reserves for the estimated future payment of claims to our policyholders based on actuarial assumptions. These assumptions are generally best estimates, with moderate provision for adverse deviation. Many factors can affect the adequacy of these reserves and liabilities, such as economic and social conditions, inflation, changes in doctrines of legal liability and extra contractual damage awards. Therefore, the reserves and liabilities we establish are necessarily based on extensive estimates, assumptions and historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, negatively affecting our operating results.
We are involved in various legal proceedings in the normal course of business. The ultimate outcome of these legal proceedings cannot be predicted with certainty. We recognize an estimated loss from these loss contingencies when we believe it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. However, it is difficult to measure the actual loss that might be incurred related to legal proceedings. The ultimate outcome of these lawsuits is not expected to have a material adverse effect on our consolidated results of operations and financial position based on our current understanding of the relevant facts and laws.
Net loss from continuing operations for 2003 was $10.2 million, or $1.26 per diluted share, compared to a loss of $7.9 million, or $.99 per diluted share for 2002.
Net loss for the fourth quarter of 2003 was $5.0 million, compared to net income of $3.6 million in the fourth quarter of 2002. Impacting the 2003 quarter was the same charges for the accelerated amortization of DAC, lower expense capitalization due to reduced new business writings of $.3 million, and reduced spread income of $.3 million. The 2002 quarter was impacted by net realized investment gains of $.7 million, the write-off of an agency receivable balance of $.2 million, and tax benefits of $1.2 million.
Premium deposits for 2003 decreased $178.5 million or 30%, to $421.0 million. Deferred annuities decreased $191.3 million or 60%, to $129.3 million. Equity indexed annuities decreased $1.4 million or 1%, to $125.3 million. Single premium immediate annuities and other deposits increased $14.3 million or 9%, to $165.8 million.
Premium deposits for 2002 increased $277 million or 86%, to $599.5 million. Deferred annuities increased $142.4 million or 80%, to $320.6 million. Equity indexed annuities increased $59.6 million or 89%, to $126.7 million. Single premium immediate annuities and other deposits increased $75.1 million or 98%, to $151.5 million.
Net investment income includes interest earned on invested assets and fluctuates with changes in 1) the amount of average invested assets supporting insurance liabilities and 2) the average yield earned on those invested assets.
During 2003, net investment income increased $7.1 million or 9% to $82.9 million. Average cash and invested assets, at book value, increased by $348.6 million or 29% due to the growth in insurance liabilities from annuity sales in recent periods.
During 2002, net investment income increased $17.3 million or 29% to $75.8 million. Average cash and invested assets, at book value, increased by $347.2 million or 39% due to the growth in insurance liabilities from annuity sales in recent periods.
Our net investment yield for 2003 was 5.34%. Our net investment yield for 2002 was 6.53%.
The decline in net investment yield for 2003 and 2002 resulted from investing new funds generated from annuity sales, from principal repayments, and from the sale of securities during this historically low interest rate environment at interest rates lower than the average portfolio rate.
Call option gains (losses) relate to equity-indexed products that are hedged with call options to limit risk against unusually high crediting rates from favorable returns in the equity market. The market value of these options fluctuate from period to period and are substantially offset by amounts credited to policyholder account balances.
During 2002, call option losses increased by $4.2 million or 71%, to $10.1 million.
See “Interest credited to interest sensitive annuities and other financial products” below for additional information regarding the impact of our equity-indexed products.
Benefits and claims include 1) mortality experience, 2) benefits from other policies that incorporate significant mortality features and 3) changes in future policy reserves. Throughout our history, we have experienced periods of higher and lower benefit claims. Such volatility is not uncommon in the life insurance industry and, over extended periods of time, periods of higher claim experience tend to offset periods of lower claim experience.
Benefits and claims in 2002 decreased by $2.5 million or 20%, to $9.9 million. This decrease includes the impact from favorable mortality of $.5 million compared to the 2001 period.
Amortization includes 1) amortization of deferred policy acquisition costs related to capitalized costs of insurance business sold, 2) amortization related to the present value of polices purchased from acquired insurance business and 3) amortization of goodwill for the 2001 period.
During 2003, commission expenses decreased $0.4 million to $3,000, primarily due to the termination of a marketing and administrative agreement in 2002.
In 2003, operating expenses increased by $1.7 million or 25%, to $8.4 million. Operating expenses increased as a result of our capitalizing $1.2 million less operating expense during 2003 as a decline in annuity sales from the record levels of $581 million for 2002 to $420 million for 2003 did not result in a corresponding decline in variable costs. In addition, operating expenses in 2003 increased by $.4 million for legal costs, including settlement amounts for the favorable disposition of several non-material claims and proceedings in the normal course of business.
In 2002, operating expenses increased $0.5 million or 8%, to $6.7 million.
In 2003, affiliated operating expenses increased $0.6 million or 12%, to $5.5 million. Affiliated operating expenses in 2003 included an additional $.7 million of rent expense pursuant to the lease agreement for 2003 and 2002 for building operating costs including utilities and taxes.
Interest expense and financing costs - affiliated represents interest expense incurred on the surplus debentures issued to Standard Management.
In 2002, affiliated interest expense and financing costs decreased by $.7 million or 27%, to $1.8 million. The decline in interest expense resulted from the decline in the prime rate.
Net realized investment gains (losses), net of related amortization fluctuate from period to period and generally arise when securities are sold in response to changes in the investment environment. Realized investment gains (losses) may affect the timing of the amortization of DAC and the amortization of the PVFP.
Net realized investment gains for 2003, net of DAC amortization of $9.6 million, were $8.2 million.
Net realized investment losses for 2002, net of DAC amortization of $9.9 million, were $9.0 million. The majority of the loss was attributable to the write-downs on the value of collateralized debt obligations due to increased default rates and securities in the energy and telecommunications sectors.
General: Our Health Services segment consists of revenues earned and expenses incurred from our pharmaceutical operations. Our primary customer base consists of consumers, academic institutions and mental health facilities. The profitability of this segment is primarily a function of gross margin on sales (the difference between sales and cost of sales and fulfillment costs) and management of our operating expenses.
Operating income - affiliated consists of income from the Financial Services segment related to management fees and rental income
During 2002, operating income - affiliated increased $.2 million or 3%, to 4.9 million.
During 2003, interest income - affiliated decreased $.1 million or 7%, to $1.7 million. The decline in interest income resulted from the decline in the prime rate.
During 2002, commission income decreased $3.8 million or 61%, to 2.4 million due to a decrease in sales by Savers Marketing.
During 2003, commission expenses decreased $.8 million or 99%, to $10,000 due to the sale of the assets of Savers Marketing.
During 2002, other operating expenses increased $1.4 million or 29%, to 6.5 million.
Interest expense and financing costs represents interest expense incurred and the amortization of debt issuance costs.
During 2002, interest expense and financing costs increased $.8 million or 24% to $4.3 million due to increased borrowings.
General: Our International Operations (discontinued operations) were sold in 2002. The 2002 and 2001 results included revenues earned and expenses incurred from abroad, primarily Europe, and include fees collected on our deposits from unit-linked assurance products. The profitability of this segment primarily was dependant on the amount of separate account assets under management, the management fee charged on those assets and management of our operating expenses.
Income before gain (loss) on sale of discontinued operations declined due to the sale of the portfolio of Premier Life (Bermuda), Limited and the sale of Premier Life (Luxembourg) S.A. in 2002.
Loss from the sale of discontinued operations in 2003 due to our settling a purchase price adjustment resulting in a $275,000 charge.
Gain from sale of discontinued operations in 2002 resulted from the sale of the portfolio of Premier Life (Bermuda), Limited and the sale of Premier Life (Luxembourg) S.A. in 2002.
We are a financial services holding company whose liquidity requirements are met through payments received from our subsidiaries. These payments include 1) surplus debenture interest, 2) dividends, 3) management fees, 4) equipment rental fees, 5) lease income and 6) allocation of taxes, all of which are subject to restrictions under applicable insurance laws and are used to pay our operating expenses and meet our debt service obligations. These internal sources of liquidity have been supplemented in the past by external sources such as revolving credit agreements and long-term debt and equity financing in the capital markets.
Surplus Debenture Interest. We loaned $27.0 million to Standard Life pursuant to unsecured surplus debenture agreements (“surplus debentures”) which requires Standard Life to make quarterly interest payments at a variable corporate base rate plus 2% per annum, and annual principal payments of $1.0 million per year beginning in 2007 and concluding in 2033. The interest and principal payments are subject to quarterly approval by the Indiana Department of Insurance, depending upon satisfaction of certain financial tests relating to levels of Standard Life’s capital and surplus and general approval of the Commissioner of the Indiana Department of Insurance. We currently anticipate these quarterly approvals will be granted. Assuming the approvals are granted and the December 31, 2003 interest rate of 6.0% continues, we expect to receive interest income of $1.6 million from the surplus debentures in 2004.
Dividends paid from Standard Life are limited by laws applicable to insurance companies. As an Indiana domiciled insurance company, Standard Life may pay a dividend or distribution from its surplus profits, without the prior approval of the Commissioner of the Indiana Department of Insurance, if the dividend or distribution, together with all other dividends and distributions paid within the preceding 12 months, does not exceed the greater of 1) net gain from operations or 2) 10% of surplus, in each case as shown in its preceding annual statutory financial statements. In 2003 and 2002, there were no dividends received from our subsidiaries. In 2004, we could receive dividends of $1.9 million from Standard Life, without regulatory approval and an additional $8.5 million with regulatory approval.
Management Fees. Pursuant to a management services agreement, Standard Life paid $ 3.6 million during 2003 for certain management services related to the production of business, investment of assets and evaluation of acquisitions. In addition, Dixie Life paid Standard Life $0.7 million in 2003, respectively, for certain management services provided. Both of these agreements provide that they may be modified or terminated by the applicable Departments of Insurance in the event of financial hardship of Standard Life or Dixie Life. In 2004, we expect to receive management fees of $3.6 million from Standard Life.
Equipment Rental Fees. In 2003, we received $1.1 million from Standard Life for the use of our equipment and we expect to receive the same amount in 2004.
principal and interest payments: $30,000 interest only per year in 2003 and 2004; principal payments thereafter beginning in 2005 through 2007.
interest payments required in 2004 based on current balances will be $1.2 million.
The following are characteristics of our trust preferred securities at December 31, 2003:
annual distribution rate of 10.25%; distributions may be deferred up to 20 consecutive quarters;
Contractual Obligations. In our day-to-day business activities, we incur certain commitments to make future payments under contracts such as operating leases and purchase orders. Maturities under these contracts are set forth in the following table as of December 31, 2003, in thousands:
Changes in interest rates may affect our incidence of policy surrenders and other withdrawals. In addition to the potential effect on liquidity, unanticipated withdrawals in a changing interest rate environment could adversely affect our earnings if we were required to sell investments at reduced values to meet liquidity demands. We manage our asset and liability portfolios in order to minimize the adverse earnings effect of changing market interest rates. We seek assets that have duration characteristics similar to the liabilities that they support. We also prepare cash flow projections and perform cash flow tests under various market interest rate scenarios to assist in evaluating liquidity needs and adequacy. Our U.S. insurance subsidiaries currently expect available liquidity sources and future cash flows to be adequate to meet the demand for funds.
Statutory surplus is computed according to rules prescribed by the NAIC as modified by the Indiana Department of Insurance, or the state in which our insurance subsidiaries do business. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative perspective. With respect to new business, statutory accounting practices require that: 1) acquisition costs (primarily commissions and policy issue costs) and 2) reserves for future guaranteed principal payments and interest in excess of statutory rates, be expensed in the year the new business is written. These items cause a reduction in statutory surplus or surplus strain in the year written for many insurance products. We design our products to minimize such first-year losses, and in 2003 none of our products cause a statutory loss in the year written. Our long-term growth goals contemplate continued growth in our insurance businesses. To achieve these growth goals, our U.S. insurance subsidiaries will need to increase statutory surplus. Additional statutory surplus may be secured through various sources such as internally generated statutory earnings, infusions with funds generated through our debt or equity offerings, or mergers with other life insurance companies. If additional capital is not available from one or more of these sources, we believe that we could reduce surplus strain through the use of reinsurance or through reduced writing of new business.
We believe that the operational cash flow of Standard Life will be sufficient to meet our anticipated needs for 2004. As of December 31, 2003, Standard Life had statutory capital and surplus for regulatory purposes of $62.8 million. As the annuity business produced by Standard Life increases, Standard Life expects to satisfy statutory capital and surplus requirements through statutory profits and through additional capital contributions by Standard Management. Net cash flow from operations on a statutory basis of Standard Life, after payment of benefits and operating expenses, was $139.8 million and $343.2 million for 2003 and 2002, respectively. The decrease is primarily due to a decline in annuity premium deposits. If the need arises for cash, which is not readily available, additional liquidity could be obtained from the sale of invested assets.
The principal liquidity requirements of our Health Services segment are its 1) cost of goods sold, 2) operating expenses, and 3) future acquisitions. The primary source of funding for these obligations has been cash flow from 1) pharmaceutical sales, 2) internal and external borrowings, and 3) capital contributions form Standard Management. The liquidity requirements of our Health Services segment have significantly exceeded cash flow from pharmaceutical sales.
We have historically operated in the financial services segment as a holding company for insurance companies. If we consummate the currently contemplated sale of Standard Life and exit the financial services segment, we would be operating solely in the health services segment, which we entered only two years ago. To date, our health services operations have generated little revenue and have sustained significant losses. In order to become profitable, our health services business will require additional capital expenditures. There can be no assurance that we would be able to obtain sufficient funds, from operating cash flow or otherwise, to successfully operate and expand the business. We have limited history operating in the health services segment and no assurance can be given that such operations will ever be profitable. See “Recent Developments” on page 3.
The price of the Company’s common stock may demonstrate increased volatility upon the announcement of a proposed sale of Standard Life or upon the consummation of such a transaction and could decline below recent levels. In the event of a significant and sustained decline, the Company could be delisted from Nasdaq.
The Company’s common stock may exhibit increased volatility upon the announcement or consummation of a transaction involving the sale of Standard Life. Depending upon investor acceptance of the proposed transaction, the price of the stock could decline below recent levels. If such decline were severe and sustained, Nasdaq could initiate action to delist the Company’s shares, which could further negatively impact the price and/or marketability
We believe that the ability to compete is dependent upon, among other things, the ability to retain and attract independent general agents to market products and the ability to develop competitive products that also are profitable. Although management believes that good relationships with our independent general agents exist, competition for those agents among insurance companies is intense. Our independent general agents typically represent other insurance companies and may sell products that compete with its products. Sales of our annuity products and, therefore, our results of operations and financial condition may be adversely affected if we are unsuccessful in attracting and retaining independent agents and marketing organizations.
Our health services segment operates in a highly competitive environment and is in direct and indirect competition with a number of other companies that operate in the pharmaceutical market space, including other retail, institutional and wholesale pharmacies, health insurers, health management organizations, pharmacy benefit managers and discount drug programs offered directly by pharmaceutical manufacturers. In addition, the provision of drugs and pharmacy benefits is a highly dynamic and evolving business which is tied closely to changes in the Medicare/Medicaid reimbursement environment, governmental entitlement program budget restrictions exercised at both the state and federal levels, cost controls imposed by third-party payors in an attempt to exercise control over spiraling health care costs, and increasing competition from pharmacies operating outside the United States which ship drugs to U.S. residents over the Internet and using other distribution channels. There are currently a number of active initiatives being pursued by local and national legislatures. On December 8, 2003, President Bush signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003, a comprehensive voluntary prescription drug benefit administered under Medicare Part D effective January 1, 2006. The new act also provides certain cost-sharing government subsidies for individuals who might otherwise qualify for drug coverage under Medicaid or similar government-funded aid programs.
Our success also depends upon the continued contributions of key officers and employees. Should one or more of these individuals leave or otherwise become unavailable for any reason, business and results of operations could be materially adversely affected.
Insurers compete with other insurance companies, financial intermediaries and other institutions on the basis of a number of factors, including the ratings assigned by A.M. Best. A.M. Best assigns ratings labeled (“A++”) through (“F”) (“Superior,” “Excellent,” “Very Good,” “Fair,” “Marginal,” “Weak,” “Poor,” “Under Regulatory Supervision,” and “In Liquidation”). Standard Life and Dixie Life have a rating of (“B+”) (Very Good) and (“B”) (Fair), respectively, by A.M. Best. A.M. Best’s ratings represent their opinion based on a comprehensive quantitative and qualitative review of our financial strength, operating performance and market profile. A rating of (“B+”) is assigned by A.M. Best to companies
Under the Internal Revenue Code of 1986, as amended (“Code”), income tax payable by policyholders on investment earnings is deferred during the accumulation period of certain life insurance and annuity products. The favorable tax treatment may give certain of our products a competitive advantage over other non-insurance products. On May 28, 2003, President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, which reduces the federal income tax rates applicable to certain dividends and capital gains realized by individuals. This legislation may lessen the competitive advantage of certain of our products relative to other investments that generate dividend or capital gain income. As a result, demand for certain of our products that offer income tax deferral may be negatively affected. Additionally, Congress has from time to time considered other legislation that would reduce or eliminate the relative benefits to policy owners of the deferral of taxation on the accretion of value within certain insurance products or might otherwise affect the taxation of insurance products and insurance companies. In particular, President Bush recently proposed legislation, currently under consideration by Congress, that would increase the amount that taxpayers may contribute each year to individual retirement
accounts, which provide deferral benefits similar to those offered by our tax-deferral products. To the extent that the Code is revised in accordance with these proposals or otherwise in a manner that reduces the tax-deferred status of insurance products, or reduces the taxation of, or expands the market for, competing products, all life insurance companies, including us, could be adversely affected.
Our invested assets, approximately $1.69 billion, represented approximately 86% of our total assets at December 31, 2003. These investments are subject to customary risks of credit defaults and changes in market values. In addition, the value of our investment portfolio depends in part on the financial condition of the companies in which we have made investments. Factors beyond our control, including interest rate levels, financial market performance, and general economic conditions may have a significant negative impact on our investment income and the value of our investment assets, which would have a material adverse affect on our financial condition.
As of December 31, 2003, approximately 79.4% or $1.2 billion of annuity contracts in force (measured by statutory reserves) were surrenderable. Approximately 9% of those contracts or approximately $99.9 million of annuity contracts in force (measured by statutory reserves) are surrenderable without charge. Changes in prevailing interest rates, ratings or other factors which result in or lead to significant levels of surrenders of existing annuity contracts could have a material adverse effect on our financial condition and results of operations. Surrenders result in a reduction of invested assets that earn investment income and a reduction of policyholder account balances that credit interest.
The assumptions are based upon, among others, interest rate spread and rates of mortality, surrender and lapse. If, for instance, future mortality rates were higher than expected, projected margins would be lower and deferred policy acquisition cost amortization would increase. The value of these assets reflected in our December 31, 2003 balance sheet totaled $166 million, or 8% of our assets. Although we have established procedures to periodically review the assumptions used to value these assets and determine the need to make adjustments, if our assumptions are incorrect and adjustments need to be made, our financial results could be materially adversely affected.
We are subject to additional risks relating to our acquisition strategy.
One component of our growth strategy contemplates our making selected acquisitions that will help grow the Health Services segment. Acquisitions involve inherent uncertainties. These uncertainties include the effect on the acquired businesses of integration into a larger organization and the availability of management resources to oversee the operations of these businesses. The successful integration of acquired businesses will require, among others:
consolidation of financial and managerial functions and elimination of operational redundancies;
We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. We have policies and procedures to conduct reviews of potential acquisition candidates for compliance with healthcare laws and to conform the practices of acquired businesses to its standards and applicable laws. We also generally seek indemnification from sellers covering these matters. We may, however, incur material liabilities for past activities of acquired businesses.