Specialty product workers' compensation insurance losses and loss adjustment expenses, or LAE, are based upon the accumulation of cost estimates for reported claims occurring during the period as well as an estimate for losses that have occurred but have not yet been reported. Similar to the health care medical expenses, we use a variety of actuarial projection methods to make these estimates and we must use our judgment in selecting development factors and assumed trends. Unlike health care medical expenses, where the cost to provide health care services is substantially completed within one year, workers' compensation claims can be paid out over a substantial number of years due to certain lifetime benefits. In addition, the period between when a claim is reported to us and when the injury occurred could be longer than one year and when we are no longer insuring the account. Loss and LAE reserves have a significant degree of uncertainty when related to their subsequent payments. Although our reserves are established on the basis of a reasonable estimate, it is not only possible but probable that our reserves will differ from their related subsequent developments. Underlying causes for this uncertainty include, but are not limited to, uncertainty in development patterns, unanticipated inflationary trends affecting the services covered by the insurance contract, adverse legal outcomes and new interpretations of laws or regulations or of disputed contract provisions that result in our having to provide new or extended benefits. This uncertainty can result in both adverse as well as favorable development of actual subsequent activity when compared to the reserve established. Any subsequent change in loss and LAE reserves established in a prior year would be reflected in the current year's operating results.
o Approximately $32.9 million in additional loss and LAE related to the increase in net earned premiums in 2001 compared to 2000.
Specialty Product Revenues increased $41.6 million or 44.2%. Revenue increased in the workers' compensation insurance segment by $42.7 million, which was offset by a slight decrease in administrative services revenue of $1.1 million. The increase in the workers' compensation insurance segment was primarily due to a larger amount of direct written premiums with an 18% composite increase in premium rates for all states and a 24% increase in production growth.
Investment and Other Revenues increased $2.1 million or 10.3% due primarily to an increase in the average invested balance during the year.
Net cash used from continuing operations for investing activities during 2001 included $9.5 million in capital expenditures associated with continued implementation of new computer systems, as well as facilities, furniture, equipment and other capital needs to support our growth, offset by net proceeds of $7.3 million for property and equipment dispositions. The net cash change in investments for the year was an increase of $51.1 million as investments were purchased with available funds.
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accrued Liabilities....................................................... $ 53,546 $ 48,423 Trade Accounts Payable.................................................... 21,578 28,411 Accrued Payroll and Taxes................................................. 14,390 16,089 Medical Claims Payable.................................................... 81,662 74,404 Current Portion of Reserve for Losses and Loss Adjustment Expenses.................................. 142,342 134,676 Unearned Premium Revenue.................................................. 52,919 41,499 Military Health Care Payable.............................................. 77,261 84,859 Current Portion of Long-term Debt......................................... 1,612 53,993 Liabilities of Discontinued Operations.................................... 83,931 110,620 --------- --------- Total Current Liabilities............................................ 529,241 592,974
Addi- tional Deferred Common Stock Paid-In Compen- Treasury Shares Amount Capital sation Stock ------ ------ -------- -------- --------
Comprehensive Income: Net Income................... $ 3,486 3,486 3,486 Other Comprehensive Loss, Net of Tax: Unrealized Holding Gain on Available- for-sale Investments 243 243 243 Reclassification Adjustment for Gains Included in Net Loss (212) (212) (212) -------- Comprehensive Income........... $ 3,517 ======== Issuance of Restricted Stock... Amortization of Deferred Compensation 342 Common Stock Issued in Connection with Stock Plans............ 2,090 Income Tax Benefit Realized Upon Exercise of Stock Options... 97 -------- -------- ------- BALANCE, DECEMBER 31, 2001..... $ (5,636) (55,222) $ 96,519 ======== ======== =======
Business. The consolidated financial statements include the accounts of Sierra Health Services, Inc. and its subsidiaries (collectively referred to as "Sierra" or the "Company"). Sierra is a managed health care organization that provides and administers the delivery of comprehensive health care and workers' compensation programs with an emphasis on quality care and cost management. Sierra's broad range of managed health care services is provided through its health maintenance organizations ("HMOs"), managed indemnity plans, military health services programs, third-party administrative services programs for employer-funded health benefit plans and its workers' compensation insurance and medical management programs. Ancillary products and services that complement the Company's managed health care product lines are also offered.
Principles of Consolidation. All significant intercompany transactions and balances have been eliminated. Sierra's consolidated subsidiaries include: Health Plan of Nevada, Inc. ("HPN") and Texas Health Choice, L.C. ("TXHC"), which are licensed HMOs; Sierra Health and Life Insurance Company, Inc. ("SHL"), a health and life insurance company; Southwest Medical Associates, Inc. ("SMA"), a multi-specialty medical provider group; Sierra Military Health Services, Inc., and its subsidiary, ("SMHS"), a company that provides and administers managed care services to certain TRICARE eligible beneficiaries; CII Financial, Inc. ("CII"), a holding company primarily engaged in writing workers' compensation insurance through its wholly-owned subsidiaries; administrative services companies; a home health care agency; a hospice; a home medical products subsidiary; and a company that provides and manages mental health and substance abuse services. TXHC is reported as part of discontinued operations.
Military Accounts Receivable. Amounts receivable under government contracts are comprised primarily of estimates of adjustments under the contract based on actual experience and estimates of the earned portion of any change orders not originally specified in the contract.
Year ended December 31, 2001 2000 1999 ---------- ---------- ----------- (In thousands) Net Beginning Losses and LAE Reserve ..................... $155,797 $134,305 $174,467 ------- ------- -------
The transaction was accounted for as a restructuring of debt; therefore all future cash payments, including interest, related to the debentures will be reductions of the carrying amount of the debentures and no future interest expense will be recognized. Accordingly, the new 9 1/2% senior debentures have a carrying amount of $19.2 million, which consists of principal amount of $15.0 million and $4.2 million in future accrued interest.
The new 9 1/2% senior debentures pay interest, which is due semi-annually on March 15 and September 15 of each year, commencing on September 15, 2001. The new 9 1/2% senior debentures rank senior to outstanding notes payable from CII Financial to Sierra and CII Financial's guarantee of Sierra's revolving credit facility. The new 9 1/2% senior debentures may be redeemed by CII Financial at any time at premiums starting at 110% and declining to 100% for redemptions after April 1, 2004. In the event of a change in control of CII Financial, the holders of the new 9 1/2% senior debentures may require that CII Financial repurchase them at the then applicable redemption price, plus accrued and unpaid interest.
The following reconciles the difference between the reported and statutory provision (benefit) for income taxes, including discontinued operations, for the years ended December 31:
2001 2000 ------------ ------------- (In thousands) Deferred Tax Assets: Medical and Losses and LAE Reserves....................... $ 10,506 $ 18,880 Accruals Not Currently Deductible......................... 16,542 14,628 Compensation Accruals..................................... 9,974 9,732 Bad Debt Allowances....................................... 4,061 6,916 Loss Carryforwards and Credits............................ 59,756 26,741 Depreciation and Amortization............................. 5,038 30,444 Unearned Premiums......................................... 1,757 1,954 Deferred Reinsurance Gains................................ 2,022 1,917 Unrealized Investment Losses.............................. 3,033 3,051 Other..................................................... 216 692 ------- ------- Total................................................... 112,905 114,955 ------- -------
Litigation and Legal Matters. The Company is subject to various claims and other litigation in the ordinary course of business. Such litigation, for example, includes claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO members and insureds and claims by providers for payment for medical services rendered to HMO members. Also included in such litigation are claims for workers' compensation and claims by providers for payment for medical services rendered to injured workers. In the opinion of the Company's management, the ultimate resolution of pending legal proceedings should not have a material adverse effect on the Company's operations or financial condition.
Granted..................................... 2,218 4.24 - 8.93 6.57 Exercised................................... (72) 3.75 - 8.00 5.25 Canceled.................................... (393) 3.19 - 24.69 10.98 ------ Outstanding December 31, 2001.................. 6,003 3.13 - 24.69 6.81 ======