On May 1, 1998, the Company moved its principal offices from 777 Main Street, Fort Worth, Texas, to 110 West Seventh Street, Fort Worth, Texas. The lease for the new facility expires in April, 2003. Westbridge Printing Services, Inc. ("WPS"), the Company's wholly owned printing subsidiary which prints all policies, forms and brochures of the Insurance Subsidiaries, maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. The Company also leases certain sales offices for its affiliated marketing agencies in Arizona and California. The Company believes that its leased facilities will meet its existing needs and that the leases can be renewed or replaced on reasonable terms if necessary.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL
Ascent Assurance, Inc. ("Ascent"), adopted its corporate name on March 24, 1999, the date its predecessor, Westbridge Capital Corp. ("Westbridge") emerged from Chapter 11 reorganization proceedings. For additional information regarding the reorganization and adoption of fresh start accounting, see Notes 1 and 2 to the Consolidated Financial Statements included at Item 8. References herein to the "Company" shall mean for all periods on or prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on or after the close of business on March 31, 1999, Ascent and its subsidiaries.
Results of operations for Ascent are reported on a pro forma basis as if Ascent and Westbridge adopted fresh start accounting on January 1, 1999 and operated as a single entity for the year ended December 31, 1999. The operating results for 1999 are compared to Westbridge's results of operations for the corresponding periods in 1998 and 1997. (In thousands except insurance operating ratios.)
* The improvement in insurance operating results for 1999. Insurance operating results for 1998 and 1997 were adversely impacted by premium deficiency charges of $4.9 million and $65.0 million, respectively. In addition, 1997 insurance operating losses were increased by a high claims and benefit ratio attributable to unprofitable business issued in 1996 and 1997. The 1.9 percentage point increase in the benefit and claims ratio for 1999 over 1998 was offset by decreases in the aggregate of other insurance operating expenses.
* Profitable fee and service results. The Company's printing and telemarketing operations generated profits during 1999 compared to losses realized in 1998 and 1997.
For 1998, total premium revenue decreased $25.4 million (or 15.8%) from 1997. The decrease was principally due to a decrease of $18.8 million (or 48.8%) in first year premiums as new business premium writings were curtailed by the Company as a result of the initiation of the Company's reorganization. Renewal premiums decreased $6.6 million (or 5.4%). Benefits and Claims. Benefits and claims are comprised of claims paid, changes in claim reserves for claims incurred (whether or not reported) and changes in future policy benefit reserves. For 1999, the 1.9 percentage point increase in the ratio of benefits and claims to premium in comparison to 1998 was principally due to unfavorable experience in the Major Medical line of business partially offset by favorable trends in the Medicare Supplement line of business. The Company continues to pursue initiatives to reduce its benefits and claims to premium ratio including the redesign of products, increased production of profitable products, premium rate increases and elimination of unprofitable business.
Commissions. The 3.6 percentage point decrease in the ratio of commissions to premium improved insurance operating results by approximately $4.2 million for 1999 as compared to 1998. The improvement in the ratio of commissions to premium is principally attributable to declining ultimate commission rates on closed blocks of business and the lower commission rate structure implemented in the conversion from a fragmented general agency marketing operation to a single career agency force in mid-1998.
The NAIC assigns securities quality ratings and uniform prices called "NAIC Designations," which are used by insurers when preparing their annual statutory reports. The NAIC assigns designations to publicly-traded as well as privately-placed securities. The ratings assigned by the NAIC range from Class 1 (highest quality rating) to Class 6 (lowest quality rating). At December 31, 1999, 66.1%, 32.0% and 1.9% of the market value of the Company's fixed maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.
The scheduled contractual maturities of the Company's fixed maturity securities, excluding short-term investments and certificates of deposit, at December 31 are shown in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
The Company's reserve requirements are also interrelated with product pricing and profitability. The Company must price its products at a level sufficient to fund its policyholder benefits and still remain profitable. Because the Company's claim and policyholder benefits represent the single largest category of its operating expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in the Company failing to price its products appropriately and to generate sufficient premiums to fund the payment thereof. The sharp increase in claim loss ratios experienced by the Company during the second and third quarters of 1997 were indicative of inadequate pricing in the Company's old Medical Expense and Medicare Supplement products. See ITEM 7 - "Operating Results."
Reinsurance. As is customary in the insurance industry, the Company's Insurance Subsidiaries reinsure portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and 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 Company, through NFL and FLICA, entered into a 90% Coinsurance Funds Withheld Reinsurance Agreement (the "Coinsurance Agreement") with a reinsurer effective July 1, 1996 on the in force Cancer, Heart and Intensive Care business. The Coinsurance Agreement provided an initial ceding commission of $10.5 million, of which $8.4 million was received in cash. On May 1, 1997, the Coinsurance Agreement was terminated and recaptured. Consistent with the terms of the agreement, the unpaid portion of the initial ceding commission allowance was repaid inclusive of interest at 15.0%. For the year ended December 31, 1997, the amount repaid was approximately $8.6 million. See NOTE 12 - "Reinsurance" and NOTE 14 - "Extraordinary Item" to the Company's Consolidated Financial Statements.
The Company generally does not cede risks associated with its Medicare Supplement products. However, 100% of the Company's risks under its Accidental Death policies currently in force are reinsured. The Company also reinsures its risks under the Medical Expense products on an excess of loss basis so that its maximum payment to any one beneficiary during any one-year period is limited ($100,000 in 1999 and 1998) for any accident or illness. In 1998, NFL entered into an excess of loss reinsurance agreement on a closed block of annually renewable term life insurance. NFL's retention limit is $25,000 per year. No other life insurance products were reinsured during 1999, 1998 or 1997. In accordance with industry practice, the reinsurance agreements 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, 1999, $0.5 million of the $2.3 million recoverable from reinsurers related to paid losses. Of this balance, all was recoverable from reinsurers rated "A" or higher by A.M. Best Company.
The Company. The Company's principal assets consist of the capital stock of its subsidiaries and invested assets. Accordingly, the Company's principal sources of funds are comprised of dividends, advances and management fees from non-insurance company subsidiaries, and tax payments under a tax sharing agreement among the Company and its subsidiaries. The Company's principal uses of cash are for capital contributions to its insurance subsidiaries and general and administrative expenses. The Company made capital contributions totaling approximately $5.9 million, $5.7 million and $45.5 million to its Insurance Subsidiaries in 1999, 1998 and 1997, respectively. The Company expects to make additional contributions to the Insurance Subsidiaries in 2000 to support planned growth in new business. Dividends on Ascent's redeemable convertible preferred stock may be paid in cash or by issuance of additional shares of preferred stock, at the Company's option. Preferred stock dividends accrued at December 31, 1999 were paid in January 2000 through issuance of 1,873 additional shares of preferred stock. As of December 31, 1999, Ascent had approximately $8.7 million in unrestricted cash and invested assets.
Consolidated. The Company's consolidated net cash used for operations totaled $2.6 million, $8.0 million and $20.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease in cash used for operations in 1999 from 1998 was primarily due to a decrease in the cash basis ratio of benefits and claims and expenses to premiums, and a reduction in reorganization costs paid. The decrease in cash used for operations between 1998 and 1997 was primarily the result of (a) amounts remitted to reinsurers during 1997 terminating certain reinsurance arrangements, and (b) high paid claim levels in 1997 attributable to unprofitable blocks of business issued in 1996 and 1997.
Net cash provided by (used for) financing activities totaled $1.0 million, $(6.0) million and $60.4 million for the years ended December 31, 1999, 1998 and 1997, respectively. Cash flows for financing activities for the years ended December 31, 1999 and 1998 were related to the net borrowings and repayments associated with the Company's Receivables Financing program (defined below). The Company's net financing cash flow increased in 1999 as a result of increasing new business production and related agent's balances. Cash flows provided by financing activities for the year ended December 31, 1997, included approximately $70.0 million in cash inflows resulting from the issuance of Westbridge's Convertible Notes that was offset, in part, by cash payments of $7.0 million to retire a note payable associated with a recaptured reinsurance agreement and $1.0 million to retire a note with a related party.
In the ordinary course of business, the Company advances commissions on policies written by its general agencies and their agents. The Company 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 Company has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the Company for the outstanding balance of the commission advance. For the years ended December 31, 1999, 1998 and 1997, the Company has recorded a net provision for uncollectible commission advances totaling $0.9 million, $0.6 million and $2.8 million, respectively.
The Company 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 and NFIC as collateral for that guaranty (the "Guaranty Agreement"). The Company's obligations under the Guaranty Agreement continue following confirmation of the Plan. As of the Effective Date, there were no events of default under the Credit or Guaranty Agreements. See NOTE 5 to the Company's Consolidated Financial Statements.
In July 1999, Ascent Management, Inc. ("AMI") received a $3.3 million term loan facility with 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, 1999, approximately $3.3 million was outstanding under the term loan facility.
With the change to the year 2000, the Company experienced no significant interruptions in its normal business processes and no disruptions to services provided to its customers and agents. For the twelve months ended December 31, 1999, the Company incurred approximately $.5 million in incremental costs related to remediation of the Company's existing systems for the Year 2000.
The Company's conversion effort to replace its existing policyholder and claim administration system with a new, more modern system continues. At December 31, 1999, this replacement effort was well under way. The Company expects total charges related to the system replacement to approximate $5.4 million of which the majority will be capitalized. For the twelve months ended December 31, 1999, the Company incurred approximately $4.8 million of the projected total of $5.4 million in costs related to the system replacement. FORWARD-LOOKING STATEMENTS:
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The preceding statements and certain other statements contained in Item 1 - "Business" and Item 7 - "Management's Discussion and Analysis of Results of Operation and Financial Condition", are forward-looking statements. These forward-looking statements are based on the intent, belief or current expectations of the Company and members of its senior management team. While the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
All other Financial Statement Schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto.
In our opinion, the 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, 1999 and March 31, 1999 and the results of their operations and their cash flows for the nine months ended December 31, 1999, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company's predecessor, Westbridge Capital Corp., filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan of Reorganization on December 17, 1998, and, after the satisfaction of a number of conditions, the Plan of Reorganization became effective on March 24, 1999 and the company emerged from bankruptcy. In connection with its emergence from Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent Assurance, Inc. and adopted fresh start accounting.
Net income $ 2,106 Other comprehensive income (loss): Unrealized holding loss arising during period, net of tax (3,956) Reclassification adjustment of gain on sales of investments included in net income, net of tax 105
Nine Months Ended December 31, 1999 -------------------- Cash Flows From Operating Activities: Net income $ 2,106 Adjustments to reconcile net income to cash used for operating activities:
Cash Flows From Financing Activities: Issuance of notes payable 4,129 Repayment of notes payable (2,055) ------------------- Net Cash Provided by Financing Activities 2,074 ------------------- Increase in Cash During Period 2,900 Cash at Beginning of Period 2,210 =================== Cash at End of Period $ 5,110 ===================
Cancellation of Existing Securities Pursuant to the Plan, the following securities of Westbridge were canceled as of the Effective Date: (i) $23.3 million aggregate principal amount and all accrued and unpaid interest on, the Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate liquidation preference of and all accrued and unpaid dividends on, Westbridge's Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi) all outstanding unexercised stock options to purchase Old Common Stock, and (vii) all unvested grants of restricted Old Common Stock.
* To holders of general unsecured claims and Convertible Notes as of December 10, 1998 6,077,500 shares, and to management at the Effective Date, 32,500 shares, or in aggregate 94% of the New Common Stock issued on the Effective Date. Holders of general unsecured claims and Convertible Notes received their first distribution of shares in partial satisfaction and discharge of the allowed claims in April 1999. The second distribution was made in September 1999 and the remaining shares of New Common Stock were distributed in November 1999.
* To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares, or 4%, of the New Common Stock issued on the Effective Date and Warrants ("New Warrants") to purchase an additional 277,505 shares, or 2%, of the New Common Stock issued on the Effective Date, on a fully diluted basis.
* To holders of Old Common Stock as of December 10, 1998, 130,000 shares or 2%, of the New Common Stock issued on the Effective Date and New Warrants to purchase an additional 693,761 shares, or 5%, of the New Common Stock issued on the Effective Date, on a fully diluted basis. Fractional shares of New Common Stock were not issued in connection with the Plan. As a result of this provision, certain holders of Old Common Stock received no distribution of New Common Stock or New Warrants under the Plan.
Basis of Presentation. The consolidated financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of Ascent Assurance, Inc. and its subsidiaries. All significant inter-company accounts and transactions have been eliminated. Certain reclassifications of prior years' amounts have been made to conform with the 1999 financial statement presentation.
Ascent's reorganization book value was determined with the assistance of its financial advisors. The significant factors used in the determination of reorganization book value were analyses of industry, economic and overall market conditions, historical and projected performance of the Company, and certain financial analyses, including discounted future cash flows.
Investments. The Company's fixed maturity portfolio is classified as available-for-sale and is carried at estimated market value. Equity securities (common and nonredeemable preferred stocks) are also carried at estimated market value. With the application of fresh start reporting, the Company's marketable securities book values under GAAP were adjusted to equal the market values of such securities at March 31, 1999. Accordingly, the stockholders' equity section of Ascent's March 31, 1999 fresh start balance sheet reflects a zero balance in accumulated other comprehensive income. Changes in aggregate unrealized appreciation or depreciation on fixed maturity and equity securities subsequent to March 31, 1999 are reported directly in stockholders' equity, net of applicable deferred income taxes and, accordingly, will have no effect on current operations.
Claim Reserves. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. These liabilities are subject to the impact of future changes in claim experience. As estimates are revised, any adjustments are reflected in current operations. No changes were made to claim reserve estimates for purposes of fresh start accounting.
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 is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. Diluted weighted average shares exclude all convertible securities for loss periods.
Ascent ----------------- Nine Months Ended December 31, 1999 -------------------- (Amounts in 000's, except per share amounts)
Basic: Income available to common shareholders $ 232 ================= Weighted average shares outstanding 6,500 ================= Basic earnings per share $ 0.04 =================
Recently Issued Accounting Pronouncements. In December 1997, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," which provides guidance on accounting for insurance-related assessments. The Company adopted SOP 97-3 on a prospective basis effective January 1, 1999. The adoption of SOP 97-3 did not have a material impact on the Company's results of operations, liquidity or financial position.
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use," which requires capitalization of certain costs after the date of adoption in connection with developing or obtaining software for internal use. The Company adopted SOP 98-1 on a prospective basis effective January 1, 1999. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, liquidity or financial position.
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:
Proceeds from sales and maturities of investments in fixed maturity securities were approximately $18.2 million for the nine months ended December 31, 1999, $7.1 million for the three months ended March 31, 1999 and $25.1 million in 1998. Gross gains of $0.1 million and gross losses of $0.3 million were realized on fixed maturity investment sales during the nine months ended December 31, 1999. Gross gains of $0.2 million and gross losses of $0.2 million were realized on fixed maturity investment sales during the three months ended March 31, 1999. Gross gains of $0.8 million and gross losses of $0.4 million were realized on fixed maturity investment sales during 1998. The basis used in determining the cost of securities sold was the specific identification method.
Credit Arrangement. The Company finances the majority of its obligations to make commission advances through Ascent Funding Inc. ("AFI"), an indirect wholly owned subsidiary. On June 6, 1997, Westbridge Funding Corporation, now AFI, entered into a Credit Agreement dated as of such date with LaSalle National Bank (the "Credit Agreement"). See NOTE 14 - "Extraordinary Item." 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, reducing the revolving loan facility to a $7.5 million facility, and extending the termination date to June 5, 2001 from June 5, 2000. As of December 31, 1999, $3.9 million was outstanding under the Credit Agreement (weighted average interest rate of 7.62%). The Company incurs a commitment fee on the unused portion of the Credit Agreement at a rate of 0.50% per annum. Interest of $0.3 million was expensed and paid in 1999.
Senior Notes. During the first quarter of 1995, the Company issued $20.0 million aggregate principal amount of its Senior Notes, due 2002, in an underwritten public offering. The Senior Notes were issued at par, less an underwriting discount of 4%. Contractual interest on the Senior Notes was payable in monthly installments. In November 1997, the Company suspended the scheduled monthly interest payments on these Senior Notes.
As of the Effective Date, these Senior Notes were canceled, extinguished and retired. As more fully described in NOTE 1, holders of Allowed 11% Senior Note Claims held by creditors other than CSFB received cash payments totaling $15.2 million.
Included in reinsurance recoverables on claim reserves is approximately $0.5 million, $0.9 million, $0.7 million and $1.9 million relating to paid claims as of December 31, 1999, March 31, 1999, and December 31, 1998 and 1997, respectively.
* Each share of 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, subject to customary anti-dilution adjustments.
The New Preferred Stock is mandatorily redeemable in cash on the fifth anniversary of the Effective Date in an amount equal to the stated value per share plus all accrued and unpaid dividends thereon to the date of redemption.
Recognition of Premium Deficiency. During 1997, policy persistency declined in connection with the implementation of certain rate increases together with intensified competitor solicitation of the Company's policyholders. These events affected the future profit margins available to absorb amortization of DPAC. As a result of these adverse changes, the Company undertook a revaluation of the recoverability of DPAC in the fourth quarter of 1997. Based on the results of this review and the impact of future projected premium revenues and the discontinuance of certain lines of business, the Company determined that a premium deficiency for certain old lines of business existed as of December 31, 1997.
Provision has not been made for state and foreign income tax expense since such expense is minimal. In addition, as described in NOTE 14 - "Extraordinary Item," the Company recognized an extraordinary loss of approximately $1.0 million for the year ended December 31, 1997. This amount has been reflected in the accompanying financial statements, net of approximately $0.5 million in deferred taxes.
As a result of the fresh start reporting (discussed at Note 2), a net deferred tax asset of $7,347 was established at March 31, 1999. This deferred tax asset was net of a valuation allowance of approximately $16.9 million for the tax effect of all but $4.5 million of the Company's net operating loss carryovers ($1.6 million net tax benefit at statutory rates), since it appeared more likely than not that the excess benefits would not be realized in future periods. At December 31, 1999, net operating loss carryovers included in total deferred tax assets reflect the effects of current operations and miscellaneous adjustments.
At December 31, 1999, the Company and its wholly owned subsidiaries have aggregate net operating loss carryforwards, net of bankruptcy related tax attribute reductions of approximately $52.9 million for regular tax and $46.8 million for alternative minimum tax purposes, which will expire in 2003 through 2014.
Under the applicable laws of the states in which insurance companies are licensed, the companies are required to maintain minimum amounts of capital and surplus. Under the laws of their states of domicile, NFL (Delaware), FLICA (Mississippi), NFIC (Texas), and AICT (Texas) are required to maintain aggregate capital and surplus of $.55 million, $1.0 million, $1.4 million, and $1.4 million, respectively. The following states where the companies are licensed require greater amounts of capital and surplus: California $2.5 million of capital and $2.5 million of surplus, Washington $4.8 million of aggregate capital and surplus and Nebraska and Tennessee $1 million of capital and $1 million of surplus. Accordingly, the minimum aggregate statutory capital and surplus which NFL and NFIC must each maintain is $5.0 million. FLICA must maintain a minimum of $4.8 million and AICT must maintain $2.0 million. At December 31, 1999, aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was approximately $15.0 million, $10.4 million, $2.0 million and $3.6 million, respectively. Although NFIC's capital and surplus is less than $5.0 million at December 31, 1999, NFIC voluntarily ceased writing new business effective December 15, 1997. Moreover, NFIC's capital and surplus exceeds the minimum requirements of its state of domicile, Texas. Statutory net (losses) income for NFL, FLICA, NFIC and AICT for the year ended December 31, 1999 were $(5.4) million, $(5.0) million, $(1.2) million and $.7 million, respectively. FLICA, through its parent FHC, is wholly owned by NFL, and AICT is wholly owned by NFIC. Accordingly, statutory capital and surplus of the parent includes the statutory capital and surplus of the respective subsidiary.
Generally, all states require insurance companies to maintain statutory capital and surplus that is reasonable in relation to their existing liabilities and adequate to their financial needs. Delaware, Texas and Mississippi also maintain discretionary powers relative to the declaration and payment of dividends based upon an insurance company's financial position. In light of the statutory losses incurred by the Insurance Subsidiaries during 1997 and 1998 and by NFL, FLICA and NFIC for 1999, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future.
The Texas Department of Insurance ("TDI") has adopted its own RBC requirements, the stated purpose of which is to require a minimum level of statutory capital and surplus to absorb the financial, underwriting and investment risks assumed by an insurer. Texas' RBC requirements differ from those adopted by the NAIC in two principal respects: (i) they use different elements to determine minimum RBC levels in their calculation formulas and (ii) they do not stipulate "Action Levels" (like those adopted by the NAIC) where corrective actions are required. However, the Commissioner of the TDI does have the power to take similar corrective actions if a company does not maintain the required minimum level of statutory capital and surplus. NFIC and AICT are domiciled in Texas and must comply with Texas RBC requirements. At December 31, 1999, AICT's RBC exceeded the minimum level prescribed by the TDI; however, NFIC's RBC was below the minimum level prescribed by the TDI.
In December 1990, the Company and NFL entered into an agreement under which NFL issued a surplus certificate to the Company in the principal amount of $2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid aggregate principal under the surplus certificate bears interest at an agreed upon rate not to exceed 10% and is repayable, in whole or in part, upon (i) NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any reinsurance agreements and (ii) NFL receiving prior approval for repayment from the Delaware Insurance Commissioner. During 1993 and 1994, NFL received such approval and repaid $2,086,000 to the Company. In 1999, with the prior approval of the Delaware Insurance Commissioner, NFL converted the remaining $776,961 of the surplus debenture to $600,000 of capital stock and $176,961 of paid in surplus.
As a result of the statutory losses sustained by the Insurance Subsidiaries since 1997, material transactions are subject to the approval by the department of insurance in each domiciliary state. In December 1997, NFIC, in response to these losses as well as the projected inability to meet RBC requirements, took appropriate steps to voluntarily cease the sale and underwriting of new business. In the second quarter of 1998, AICT significantly reduced the level of sales and underwriting of new business. NFIC and AICT have also 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 TDI. The Company has no current plans to underwrite new products in NFIC.
In September 1986, the Company established a retirement savings plan ("401(k) plan") for its employees. As amended in August 1999, all 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. Ascent Assurance, Inc. is the plan administrator, and may amend, terminate or suspend contributions to the plan at any time it may deem advisable. Employees who elect to participate may contribute up to 10% of pre-tax compensation, including commissions, bonuses and overtime. The Company may make discretionary contributions, determined by the Company's 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. Generally, the Company contributions are in the form of common stock. During the period of July 1998 through December 1999, the Company made cash contributions. The Company's contributions to the 401(k) plan in 1999, 1998 and 1997 approximated $123,000, $80,000 and $106,000, respectively.
Outstanding at January 1, 1999 - Granted 1,106,750 Exercised - Forfeited / Cancelled (10,000) ======================= Outstanding at December 31, 1999 1,096,750 =======================
The weighted average fair value of options granted during 1999 was $2.85. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following significant weighted-average assumptions used for grants in 1999: dividend yield of 0%; expected volatility of 1.142; risk free interest rate of 6.57%; expected life of 5 years.
Total compensation cost recognized in the income statement for stock-based employee compensation awards was $300,471 for 1999.
The Company's future minimum lease payments for non-cancelable operating leases, relating primarily to office facilities and data processing equipment having a remaining term in excess of one year, at December 31, 1999, aggregated $6.9 million. The amounts due by year are as follows: 2000-$2.3 million; 2001-$1.6 million; 2002-$1.3 million; 2003-$0.8 million; 2004-$0.5 million; and thereafter-$0.4 million. Aggregate rental expense included in the consolidated financial statements for all operating leases approximated $2.4 million, $3.2 million and $4.4 million in 1999, 1998 and 1997, respectively.
Summarized quarterly financial information for each of the Company's last two years of operations is as follows (in thousands, except per share data):
Assets: Cash $ 4,027 $ 658 Short-term investments 4,686 1,906 Fixed maturities, at market value - 7,564 Equity securities, at market value - 910 Investment in consolidated subsidiaries 45,021 41,959 Accrued investment income 3 171 Deferred tax assets 646 - Other assets 50 25 --------------- ------------- Total Assets $ 54,433 $ 53,193 =============== ============= Liabilities: Dividends payable $ 1,874 $ - Other liabilities 5,518 2,833 --------------- ------------- Total Liabilities 7,392 2,833 --------------- -------------
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY) (now Ascent Assurance, Inc.) CONDENSED BALANCE SHEET
Total Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Deficit $ 55,313 =====================
Net income $ 2,106 Other comprehensive income (loss): Unrealized holding loss arising during period, net of tax (245) Reclassification adjustment of loss on sales of investments included in net income, net of tax 245
Other comprehensive loss on investment in subsidiaries: Unrealized holding loss arising during period, net of tax (3,711) Reclassification adjustment of loss on sales of investments included in net income, net of tax (140) ==================== Comprehensive loss $ (1,745) ====================
Cash Flows From Investing Activities: Proceeds from sale of fixed maturity investments 3,938 Cost of fixed maturity investments acquired (699) Proceeds from sale of equity securities 873 Net change in short term investments (2,780) Capital contributions to subsidiaries (500) --------------------- Net Cash Provided by Investing Activities 832 ---------------------