Net loss for the year ended December 31, 2000 includes a non-cash charge of $10.4 million related to an increase in the deferred tax asset valuation allowance which increased loss per share and decreased book value per share by $(1.60). See “Financial Condition - Deferred Tax Asset” at Item 7.
Business Overview. Ascent Assurance, Inc. (“Ascent” or the “Company”) is the successor to a Delaware company incorporated in 1982 as an insurance holding company. Ascent is engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners.
The Company’s revenues result primarily from premiums and fees from the insurance products sold by its wholly-owned subsidiaries National Foundation Life Insurance Company (“NFL”), Freedom Life Insurance Company of America (“FLICA”), National Financial Insurance Company (“NFIC”) and American Insurance Company of Texas (“AICT”), and together with NFL, NFIC and FLICA, collectively, the “Insurance Subsidiaries”, and marketed by NationalCare® Marketing, Inc. (“NCM”), also a wholly-owned subsidiary. To a lesser extent the Company derives revenue from (i) tele-survey services, (ii) printing services, and (iii) renewal commissions received by the Company for prior year sales of insurance products for unaffiliated insurance carriers.
Decrease (increase) in deferred acquisition costs 0.2 % (0.7 %) (5.7 %)
are calculated as a percent of premiums with the exception of the general and administrative expense ratio is calculated as a percent of total insurance operating revenue.
The $4.6 million and $12.2 million improvements in insurance operating results for 2002 and 2001, respectively, are principally attributable to 4.1 and 10.4 percentage point reductions, respectively, in the benefit and claims to premium ratios, due to a favorable change in major medical product mix. Since July 2000, the Company has been marketing a new major medical policy in all significant marketing regions. The new product was designed to produce a substantially lower benefits ratio than previously marketed major medical products.
The Company reported no income tax benefit for 2002 and 2001 and incurred tax expense for 2000 of $6.0 million due to the establishment of a valuation allowance beginning December 31, 2000 for all net deferred tax assets. (See “Financial Condition - Deferred Tax Asset”.)
Total premiums for 2002 decreased $14.2 million, or 11.3%, as compared to 2001 principally as a result of accelerated lapsing of major medical products marketed prior to July 2000 and the normal lapsing of supplemental specified disease and Medicare supplement policies. Total premiums for 2001 increased $5.3 million, or 4.4% as compared to 2000 as new business production exceeded the expected decline in premiums from the older, closed blocks of business. Comprehensive major medical products comprised 98% and 97% of new business sales in 2002 and 2001, respectively, and represented 63% of consolidated premium revenue for 2002 as compared to 62% for 2001 and 55% for 2000.
In July 2000, the Company began marketing a new comprehensive major medical policy in all significant marketing regions. The new major medical policy is designed to produce a substantially lower benefits and claims to premium ratio than previously marketed products. Annual premiums for new major medical policies in force at December 31, 2002 were $40.5 million as compared to $29.2 million at December 31, 2001 and $8.7 million at December 31, 2000.
Net Investment Income. Net investment income decreased $1.1 million in 2002 and $0.9 million in 2001 as compared to the corresponding prior year primarily due to a decline in receivables from agents and lower market interest rates for fixed maturity investments.
Investments. Investment income is an important source of revenue, and the Company’s return on invested assets has a material effect on net income. The Company’s investment policy is subject to the requirements of regulatory authorities. In addition, certain assets are held on deposit in specified states and invested in specified securities in order to comply with state law. Although the Company closely monitors its investment portfolio, available yields on newly-invested funds and gains or losses on existing investments depend primarily on general market conditions. The Company’s investment portfolio is managed by Seneca Capital Management, LLC, a registered investment advisor.
At December 31, 2002, the Company had available tax net operating loss carryforwards (“NOLs”) of $54.9 million that expire between 2003 and 2017. The establishment of a valuation allowance for GAAP does not impair the availability of NOLs for utilization in the Company’s federal income tax return.
Claim Reserves. Claim reserves are established by the Insurance Subsidiaries for benefit payments which have already been incurred by the policyholder but which have not been paid by the applicable Insurance Subsidiary. Claim reserves totaled $30.9 million at December 31, 2002 as compared to $37.2 million at December 31, 2001. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns as a result of the implementation of a new claims administration system in May 2000. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.
Reinsurance. As is customary in the insurance industry, the Insurance Subsidiaries reinsure, or cede, portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and a coinsurance basis. Cession of reinsurance is utilized by an insurer to limit its maximum loss; thereby, providing a greater diversification of risk and minimizing exposures on larger risks. Reinsurance does not discharge the primary liability of the original insurer with respect to such insurance, but the Company, in accordance with prevailing insurance industry practice, reports reserves and claims after adjustment for reserves and claims ceded to other companies through reinsurance.
The Insurance Subsidiaries reinsure risks under each of their respective major medical policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $125,000. Risks under its Medicare Supplement policies are not reinsured. Risks under the Insurance Subsidiaries’ Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retain fifty percent (50%) of the coverage amount of each of its life insurance policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL’s retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates.
At December 31, 2002, approximately $0.5 million of the $2.4 million recoverable from reinsurers is related to paid losses. Of this balance, all was recoverable from reinsurers rated “A” or higher by the A.M. Best Company.
Ascent is a holding company, the principal assets of which consist of the capital stock of its subsidiaries and invested assets. Ascent’s principal sources of funds are comprised of dividends from its non-insurance subsidiaries. The Insurance Subsidiaries are precluded from paying dividends without prior approval of the Texas Insurance Commissioner as the Insurance Subsidiaries’ earned surplus is negative due to statutory losses incurred in recent years (see “Business - Regulations” at Item 1). Ascent’s principal uses of cash are for capital contributions to maintain minimum statutory capital and surplus requirements for the Insurance Subsidiaries and general and administrative expenses. Ascent funded capital contributions to the Insurance Subsidiaries totaling approximately $2.3 million, $19.3 million and $8.2 million during 2002, 2001 and 2000, respectively, as a result of combined statutory losses incurred by the Insurance Subsidiaries for those years of $2.7 million, $12.7 million and $17.0 million, respectively. As of December 31, 2002, Ascent had approximately $375,000 in unrestricted cash and invested assets. In February 2003, Ascent funded contributions of $252,000 to two of its insurance subsidiaries.
CSFB Financing and Preferred Stock. Ascent received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from Credit Suisse First Boston Management Corporation (“CSFB”), which is an affiliate of Special Situation Holdings, Inc. - Westbridge (Ascent’s largest common stockholder). The credit agreement relating to that loan (“CSFB Credit Agreement”) provided Ascent with total loan commitments of $11 million, all of which were drawn in April 2001. The loan bears interest at a rate of 12% per annum and matures in April, 2004. Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During 2002 and 2001, Ascent issued $1.5 million and $987,000, respectively, in additional notes for payment of interest in kind which increased the note payable balance at December 31, 2002 to approximately $13.5 million. The CSFB Credit Agreement provides for a facility fee of $1.5 million which is payable upon maturity or upon a change in control, as defined. This facility fee is being accrued as additional interest payable over the term of the loan. The CSFB Credit Agreement is secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of Ascent and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding, Inc. and Ascent Management, Inc., some or all of which is pledged as collateral for bank financing described below). Ascent’s subsidiaries (other than those listed above) have also guaranteed Ascent’s obligations under the CSFB Credit Agreement. At December 31, 2002, there were no events of default.
Bank Financing. The majority of commission advances to NCM’s agents are financed through Ascent Funding, Inc. (“AFI”), an indirect wholly-owned subsidiary of Ascent. AFI has entered into a Credit Agreement (the “Credit Agreement”) with LaSalle Bank, NA (“LaSalle”) that currently provides AFI with a $4.5 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and other affiliates. In connection with this commission advancing program approximately $3.0 million was outstanding under the Credit Agreement at December 31, 2002.
The Credit Agreement expires January 5, 2004, at which time the outstanding principal and interest will be due and payable. Under the terms of the Credit Agreement, agent advances made within six months of the expiration date (after July 5, 2003) are not eligible for financing. Failure of the Company to obtain additional renewals of the Credit Agreement beyond January 2004 could have a material adverse impact on Ascent’s liquidity and capital resources. Lack of adequate financing would impair the Company’s ability to pay competitive commission advances and reduce new business sales needed to replace the normal lapsing of existing policies. Therefore, failure by Ascent to maintain new business sales at current levels would result in declining premium revenue and could have a material adverse impact on Ascent’s results of operations.
In July 1999, Ascent Management, Inc. (“AMI”) received a $3.3 million term loan from LaSalle, proceeds of which were used to fund system replacement costs. Advances under the term loan facility are secured by substantially all of AMI’s assets and the Guaranty Agreement. Under the terms of the loan, principal is payable in 60 equal monthly installments beginning January 31, 2000. At December 31, 2001, approximately $1.6 million was outstanding under the term loan facility.
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002 2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2001 and 2000 consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Ascent Assurance, Inc. and its subsidiaries at December 31, 2001 and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules as of December 31, 2001 and for the years ended December 31, 2001 and 2000 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 of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Ascent Assurance, Inc. (“Ascent”) is the successor to a Delaware company originally incorporated in 1982 as an insurance holding company. Ascent is engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners.
The Company’s operations are comprised of one segment, Accident and Health insurance. The principal products currently underwritten are medical expense reimbursement and supplemental policies. To a lesser extent the Company derives revenue from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions received by the Company for prior year sales of insurance products underwritten by unaffiliated insurance carriers.
Agent Receivables. In the ordinary course of business, a subsidiary of Ascent advances commissions on policies written by its general agencies and their agents. Net agent receivables were $6.3 million and $7.4 million at December 31, 2002 and 2001, respectively. Such subsidiary is reimbursed for these advances from the commissions earned over the respective policy’s life. In the event that policies lapse prior to the time the subsidiary has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the outstanding balance of the commission advances. A reserve for uncollectible agent’s balances is routinely established based upon historical experience and projected commission earnings. As of December 31, 2002 and 2001, the allowance for uncollectible commission advances was $4.6 million and $4.0 million, respectively.
Future Policy Benefits. Liabilities for future policy benefits not yet incurred are computed primarily using the net level premium method including actuarial assumptions as to investment yield, mortality, morbidity, withdrawals, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on the experience of each of the Insurance Subsidiaries, as adjusted to provide for possible adverse deviation. Generally, these actuarial assumptions are fixed and, absent material adverse benefit experience, are not adjusted.
Claim Reserves. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns as a result of the implementation of a new claims administration system in May 2000. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.
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, 2002 and 2001 is fully reserved as discussed at Note 9.
Earnings Per Share. Under GAAP, there are two measures of earnings per share: “basic earnings per share” and “diluted earnings per share.” Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. For the years 2002, 2001 and 2000, stock options of 1,014,650, 1,085,850 and 944,600, respectively, and the conversion of the preferred stock (see Note7) could potentially dilute basic earnings per share in the future but were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive.
developments in health care reform and other regulatory issues, including the Health Insurance Portability and Accountability Act of 1996 and increased privacy regulation, and changes in laws and regulations in key states where the Company operates;
In June 2001, the FASB issued SFAS No. 141, “Business Combinations” (SFAS 141”). This statement supercedes APB Opinion No. 16, “Business Combinations” and FASB Statement No. 38, “Accounting for Preacquisition Contingencies of Purchased Enterprises”, and establishes accounting and reporting standards for business combinations. Under the statement, all business combinations in the scope of the statement are to be accounted for using one method, the purchase method. The provisions of the statement apply to all business combinations initiated after June 30, 2001. As the Company has not been a part of any business combination initiated after the effective date, the Company’s financial statements are not affected by SFAS 141.
In June 2001, the FASB issued SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 142 supersedes APB 17, “ Intangible Assets,” and is effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their initial recognition. SFAS 142 (1) prohibits the amortization of goodwill and indefinite-lived intangible assets, (2) requires testing of goodwill and indefinite-lived intangible assets on an annual basis for impairment (and more frequently if the occurrence of an event or circumstance indicates an impairment), (3) requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill and (4) removes the forty-year limitation on the amortization period of intangible assets that have finite lives. The Company adopted SFAS 142 on January 1, 2002 and did not recognize an impairment loss. The Company has no goodwill or indefinite-lived intangible assets. The Company has identified intangible assets totaling $2.8 million included in deferred policy acquisition costs representing the estimated present value of future profits of certain insurance policies acquired prior to March 1999. The Company has determined that there is no indication of impairment related to these assets and that the useful lives assigned to the assets are appropriate. The Company tests these intangibles for impairment annually or more frequently if the occurrence of an event or circumstances indicates impairment.
In August 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 will be effective for financial statements issued for fiscal years beginning after June 15, 2002. An entity shall recognize the cumulative effect of adoption of SFAS No. 143 as a change in accounting principle. The Company does not expect the adoption of the statement to materially impact the Company’s results of operations and financial position.
On June 28, 2002, the FASB voted in favor of issuing SFAS No. 146, “Accounting for Exit or Disposal Activities”. SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in the EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 will be effective for financial statements issued for fiscal years beginning after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to materially impact the Company’s results of operations and financial position.
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institution, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9". The statement removes acquisitions of financial institutions from the scope of FASB Statements No. 72, and Interpretation 9 and requires those transactions to be accounted for in accordance with FASB Statements No. 141, “Business Combinations”, and No. 142, Goodwill and Other Intangible Assets.” SFAS No. 147 is effective for acquisitions on or after October 1, 2002. The Company does not expect the adoption of the statement to materially impact the Company’s results of operations and financial position.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45 (“FIN 45”), “ Guarantees,” an interpretation of FASB Statement No. 5, “Accounting for Contingencies.” This interpretaion elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantees. This interpretation is effective on a propective basis for guarantees issued or modified after December 31, 2002 and for financial statements of interim or annual periods ending after December 15, 2002. This interpretation did not have a material impact on the Company’s financial position or results of operations.
Unrealized (depreciation) appreciation on investments is reflected directly in stockholders’ equity as a component of accumulated other comprehensive (loss) income and is summarized as follows:
Balance at beginning of period $ (121 ) $ (2,324 )
The amortized cost and estimated market value of investments in available-for-sale fixed maturities as of December 31, 2002, 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.
Proceeds from sales and maturities of investments in fixed maturity securities were approximately $57.2 million, $37.9 million and $54.1 million for 2002, 2001 and 2000 respectively. Gross gains of $1.6 million and gross losses of ($1.8) million were realized on fixed maturity investment sales during 2002. Gross gains of $0.7 million and gross losses of ($0.3) million were realized on fixed maturity investment sales during 2001. The basis used in determining the cost of securities sold was the specific identification method.
Issues through 1980 are 6.5% graded to 4.5% in 25 years; most 1981 through 1992 issues are 10% graded to 7% in 10 years except for certain NationalCare® and Supplemental Hospital Income issues which are 8% graded to 6% in 8 years and LifeStyles Products which are 9% graded to 7% in 10 years. 1993 and later issues are 7% level. Certain policies acquired in 1992 are 6.4% level while other policies acquired in 1993 and 1994 are 6% level. Policies acquired in the acquisition of NFIC and AICT are 7% level.
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.
Claims incurred related to prior years for 2000 of $1.55 million was primarily attributable to higher than expected medical inflation and utilization. Claims incurred related to prior years for 2001 of $1.785 million was primarily attributable to actual medical trends for the latter part of 2000 developing more favorably than management’s estimates. Claims incurred related to prior years for 2002 of $0.417 million approximated management’s estimates.
Included in reinsurance recoverables on claim reserves is approximately $0.5 million, $0.9 million and $1.5 million relating to paid claims as of December 31, 2002, 2001 and 2000, respectively.
CSFB Financing. Ascent received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from Credit Suisse First Boston Management Corporation (“CSFB”), which is an affiliate of Special Situations Holdings, Inc. - Westbridge (Ascent’s largest stockholder.) The credit agreement relating to that loan (“CSFB Credit Agreement”) provided Ascent with total loan commitments of $11 million, all of which were drawn in April 2001. The loan bears interest at a rate of 12% per annum and matures in April, 2004. Terms of the CSFB Credit Agreement are equivalent to terms that exist in arm’s-length credit transactions. The Company must obtain additional financing to retire the note payable when it matures or restructure the terms of the note.
The CSFB Credit Agreement is secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of Ascent and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding Corporation and Ascent Management, Inc., some or all of which is pledged as collateral for bank financing described below). Ascent’s subsidiaries (other than those listed above) have also guaranteed Ascent’s obligations under the CSFB Credit Agreement. Under this agreement, the Company is required to meet certain restrictive requirements including minimum statutory capital and surplus and RBC ratios for its Insurance Subsidiaries, minimum net worth and other. At December 31, 2002, there were no events of default.
Bank Financing. The majority of commission advances to NCM’s agents are financed through Ascent Funding, Inc. (“AFI”), an indirect wholly-owned subsidiary of Ascent. AFI has entered into a Credit Agreement (the “Credit Agreement”) with LaSalle that currently provides AFI with a $4.5 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and other affiliates. The Credit Agreement is senior to all other financing arrangements of the Company. As of December 31, 2002, $3.0 million was outstanding under the Credit Agreement. AFI incurs a commitment fee on the unused portion of the Credit Agreement at a rate of 0.50% per annum. Interest of $0.2 million, $0.4 million and $0.5 million was expensed and paid in 2002, 2001 and 2000, respectively.
AFI’s obligations under the Credit Agreement are secured by liens upon substantially all of AFI’s assets. AFI’s principal assets at December 31, 2002 are net agent receivables of $6.3 million and a short-term investment account pledged to LaSalle of $2.6 million. In addition, Ascent has guaranteed AFI’s obligations under the Credit Agreement, and has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty (the “Guaranty Agreement”). Under these agreements, the Company is required to meet certain restrictive requirements including minimum statutory capital and surplus and RBC ratios for its Insurance Subsidiaries, minimum net worth and other. As of December 31, 2002, there were no events of default under the Credit or Guaranty Agreements.
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. As of December 31, 2002, $1.6 million was outstanding under the term loan facility (weighted average interest rate of 6.16%). Interest of $70,000 was expensed and paid in 2002. Interest of $0.2 million was expensed and paid in 2001 and 2000.
The Company has authorized 40,000 shares of non-voting preferred stock. At December 31, 2002, 33,896 shares of preferred stock were outstanding, all of which are owned by Special Situations Holdings, Inc. - Westbridge, which is the Company’s largest common stockholder and is also an affiliate of CSFB.
The provision for income taxes is calculated as the amount of income taxes expected to be payable for the current year plus (or minus) the deferred income tax expense (or benefit) represented by the change in the deferred income tax assets and liabilities at the beginning and end of the year. The effect of changes in tax rates and federal income tax laws are reflected in income from continuing operations in the period such changes are enacted.
The provision for U.S. federal income taxes charged to continuing operations was as follows:
The differences between the effective tax rate and the amount derived by multiplying the (loss) income before income taxes by the federal income tax rate for the Company’s last three years was as follows:
As a result of losses from major medical products marketed prior to July 2000, FLICA required significant capital contributions during 2000 and 2001 to comply with minimum statutory capital and surplus requirements. In April 2001, Ascent obtained debt financing of $11 million from a subsidiary of CSFB. The proceeds of this loan were used to fund an $11 million capital contribution to FLICA. Claims experience in excess of management’s current expectations could have a material adverse impact on the Insurance Subsidiaries’ ability to meet minimum statutory capital and surplus requirements and maintain new business production at current levels and therefore have a material adverse impact on Ascent’s liquidity and capital resources and results of operations.
If a Company’s total adjusted capital is less than or equal to 100 percent but greater than 70 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.
The Texas Department of Insurance adopted the NAIC’s Model Act during 2000. NFL’s and FLICA’s statutory annual statements for the year ended December 31, 2002 filed with the Texas Department of Insurance reflect total adjusted capital in excess of Company Action Level RBC.
In 1998, NFIC and AICT entered into a voluntary consent order, pursuant to Article 1.32 of the Texas Insurance Code, providing for the continued monitoring of the operations of NFIC and AICT by the Texas Department of Insurance in response to losses sustained in 1997 and 1998 as well as the projected inability to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of new business in 1998. At December 31, 2002, AICT’s RBC exceeded Company Action Level RBC; however, NFIC’s RBC only exceeded Authorized Control Level RBC. Both NFIC and AICT are in compliance with the terms of the voluntary consent order.
Under Florida Statutes Section 624.4095, Florida licensed insurance companies’ ratio of actual or projected annual written premiums to current or projected surplus as regards to policyholders (“the premium writing ratio”) may not exceed specified levels for gross and net written premiums as defined by the statute. If a company exceeds the premium writing ratio, the Florida Department of Insurance shall suspend the company’s certificate of authority in Florida or establish by order maximum gross or net annual premiums to be written by the company consistent with maintaining the ratios specified. At December 31, 2002, the premium writing ratio for FLICA, which currently underwrites insurance policies in Florida, met the limit mandated by Florida law.
The statutory financial statements of the Insurance Subsidiaries are prepared using accounting methods that are prescribed or permitted by the insurance department of the respective companies’ state of domicile. Prescribed statutory accounting practices include the NAIC Codification of Statutory Accounting practices as well as state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
A reconciliation of capital and surplus and net loss as reported on a statutory basis by the Company’s Insurance Subsidiaries to the Company’s consolidated GAAP stockholders’ equity and net loss is as follows:
Future policy benefits and claims (5,303 ) (7,049 ) (14,338 )
Capital contributions to insurance subsidiari (39,001 ) (38,189 ) (21,362 )
Consolidated GAAP net loss $ (931 ) $ (2,119 ) $ (18,942 )
In September 1986, a subsidiary of the Company established a retirement savings plan (“401(k) plan”) for its employees. As amended in August 1999, such employees are eligible to participate in the 401(k) plan upon completion of six months of service. The 401(k) plan is qualified under Section 401(a) of the Internal Revenue Code (“IRC”) and the trust established to hold the assets of the 401(k) plan is tax-exempt under Section 501 (a) of the IRC. The subsidiary is the plan administrator, and may amend, terminate or suspend contributions to the plan at any time it may deem advisable. Employees of this subsidiary who participate may contribute up to 10% of pre-tax compensation, including commissions, bonuses and overtime. This subsidiary may make discretionary contributions, determined by its Board of Directors, up to 50% of the employees’ first 3% of deferred compensation. Certain IRC required limitations may be imposed for participants who are treated as “highly compensated employees” for purposes of the IRC. Participants vest 25% after one year of service, 50% after two years of service, 75% after three years of service and 100% after 4 years of service. Employee contributions are invested in any of ten investment funds at the discretion of the employee. Contributions to the 401 (k) plan in 2002, 2001 and 2000 by the Company’s subsidiaries approximated $72,000, $81,000 and $92,000, respectively.
The 1999 Plan became effective on the date of its adoption by the Company and will remain in effect until December 31, 2008, except with respect to awards (as that term is defined in the 1999 Plan) then outstanding, unless terminated or suspended by Ascent’s Board of Directors at that time. After such date no further awards shall be granted under the 1999 Plan.
Forfeit / Cancelled / Expired (189,100 ) (14,500 ) (195,100 )
The weighted average option exercise price was $2.30, $2.63 and $2.82 for options outstanding at December 31, 2002, 2001 and 2000, respectively. For options granted, weighted average exercise price was $0.65, $1.49 and $1.63 for 2002, 2001 and 2000. For options forfeited / cancelled / expired, the weighted average exercise price was $3.23, $2.77 and $2.74, respectively. For options exercised in 2002, the weighted average exercise price was $.01.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compenstaion, to stock-based employee compensation.
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 loss of the stock compensation amortization for the year presented above is not likely to be representative of the effects on reported net loss for future years.
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. Each Insurance Subsidiary remains liable to policyholders to the extent the reinsuring companies are unable to meet their treaty obligations. Total premiums ceded to other companies were $4.0 million, $2.8 million and $4.0 million for 2002, 2001 and 2000, respectively. Face amounts of life insurance in force ceded approximated $17.2 million, $16.6 million and $12.6 million at December 31, 2002, 2001 and 2000, respectively.
The Insurance Subsidiaries reinsure their respective risks under their Medical Expense policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $125,000. Risks under its Medicare Supplement policies are not reinsured. Risks under Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retain fifty percent (50%) of the coverage amount of each of its life insurance policies in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL’s retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates. All reinsurers of the Company’s Insurance Subsidiaries are rated “A” or higher by the A.M. Best Company.
Basic $ (0.27 ) $ (0.23 ) $ (0.08 ) $ (0.20 )
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
Accounts receivable and accounts payable. The carrying amounts reported in the balance sheet for accouts receivable and accounts payable approximates their fair value
Available-for-sale securities. The fair values for available-for-sale securities are based on quoted market prices (See Note 3).
undistributed net earning of subsidiaries (2,890 ) (2,219 ) (114 )
The financial statement should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
The financial statements should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto.
(Decrease) increase in payables to subsidiaries (362 ) (3,980 ) 4,999
Decrease in Cash During the Period (550 ) (510 ) (2,620 )
Segment Deferred Policy Acquisition Costs Future Policy Benefits, Losses, Claims and Loss Expenses Other Policy Claims and Benefits Payable Premium Revenue Net investment Income Benefits and Claims Expense Amortization of Policy Acquisition Costs Other Operating Expenses Premiums Writtem*
Total $ 25,600 $61,571 $37,202 $125,206 $ 8,867 $ 93,376 $ 8,319 $55,805 $125,515
Total $ 24,711 $61,306 $42,778 $119,908 $ 9,741 $101,940 $ 2,998 $67,683 $120,667
receivables $ 6,060 $ (722 ) $ (1,627 ) $ 3,711
Deferred tax valuation allowance $ 16,949 $ 1,314 $ - $ 18,263