Acquired policies: AII 6,127 7,179 8,364 LHI 1,345 1,533 1,820 DNL 2,619 2,827 2,974 NFIC and AICT 18,607 20,757 24,508 FLICA 10,011 12,605 14,560 Other 931 831 10 -------- -------- -------- Total acquired policy premiums 39,640 45,732 52,236 -------- -------- -------- Total Premiums $135,717 $161,097 $156,780 ======== ======== ========
COMMISSIONS. Commissions increased $13.3 million, or 80.1%, from $16.7 million to $30.0 million. This variance was attributable to a decrease in the commissions that would ordinarily be deferred and amortized as a component of DPAC and an increase in the amounts that are being expensed as commissions on a current basis. The increase was attributable to an increase in commissions of $13.2 million on Company-issued policies and $0.9 million, or 8.6%, on sales of unaffiliated insurance products, and was offset by a decrease in commissions on sales of acquired policies of $0.8 million, or 16.0%. GENERAL AND ADMINISTRATIVE EXPENSES. For the year ending December 31, 1998, general and administrative expenses decreased $3.3 million, or 10.5%, from $31.4 million to $28.1 million. These decreases were primarily attributable to corporate overhead reduction initiatives that were implemented beginning in the fourth quarter of 1997.
During the second and third quarters of 1997, the Company's Insurance Subsidiaries experienced a substantial increase in claim loss ratios on certain Medical Expense and Medicare Supplement products. Independent reviews of the Company's claim reserves were performed as of September 30, 1997. Additionally, an independent benefit analysis of claims was completed which indicated that significant rate increases would be required to offset the current adverse claims experience. However, until such time as the necessary rate increases and benefit modifications can be fully implemented, the Company expects that it will continue to incur operating losses. There can be no assurance that the full extent of such rate increase requests will be approved.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $4.3 million, or 15.9%, from $27.1 million to $31.4 million. This increase was primarily attributable to increases in the allowance for doubtful agent receivables and a change in estimate for the recognition of deferred compensation expense. In addition, fewer policies were eligible for deferral of acquisition costs as a result of the reduction in the Company's marketing efforts for its underwritten insurance products beginning in the second quarter of 1996.
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, the Company does not expect to receive any dividends from its Insurance Subsidiaries for the foreseeable future.
The Company's consolidated net cash used for operations totaled $8.0 million, $20.0 million and $10.8 million for the years ended December 31, 1998, 1997 and 1996, respectively. The variance in the amount of net 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) the reduction in the Company's marketing results for its underwritten products, which resulted in a decrease in net cash used for operations related to the funding of agents' debit balances. The variance in the amount of net cash used for operations between 1997 and 1996 was primarily the result of (a) increases in the claim loss ratios of the Company's Medical Expense and Medicare Supplement products, and (b) increases in amounts remitted to reinsurers under certain reinsurance arrangements.
See NOTES 6 and 11 regarding the status of the Company's financing arrangements and Insurance Subsidiaries.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Westbridge Capital Corp. ("the Company"), and its six wholly owned subsidiaries: National Foundation Life Insurance Company ("NFL"), National Financial Insurance Company ("NFIC"), Westbridge Management Corp. ("WBMC"), NationalCare Marketing(R), Inc. ("NCM"), Westbridge Printing Services, Inc. ("WPS"), and Foundation Financial Services, Inc. ("FFS"). In addition, the consolidated financial statements include the accounts of the Company's indirect, wholly owned subsidiaries: (a) Freedom Life Insurance Company of America ("FLICA") is a wholly owned subsidiary of Freedom Holding Company ("FHC"), and FHC is a wholly owned subsidiary of NFL, (b) American Insurance Company of Texas ("AICT") is a wholly owned subsidiary of NFIC, and (c) NCM owns 100% of Westbridge Funding Corporation ("WFC"), Precision Dialing Services, Inc. ("PDS"), Senior Benefits, LLC ("Senior Benefits"), LifeStyles Marketing Group, Inc. ("LifeStyles Marketing"), American Senior Security Plans, LLC ("ASSP"), and Westbridge Financial Corp. The consolidated financial statements also include the accounts of the Company's 80%-owned subsidiary Health Care-One Marketing Group, Inc. ("HCO Marketing") as well as the Company's 50%-owned subsidiary, Health Care-One Insurance Agency, Inc. ("Health Care-One"). The Company's decision to consolidate the accounts of Health Care-One is based on the extent to which the Company exercises control over Health Care-One. The Company has agreed to provide 100% of the financing required to support the marketing efforts of Health Care-One and also has significant input in its management. All significant intercompany accounts and transactions have been eliminated.
As more fully described in NOTE 8, in order to provide Westbridge with sufficient funds to make the cash distributions to the holders of the Allowed 11% Senior Notes under the Plan, the Company entered into a Stock Purchase Agreement with CSFB, a significant noteholder, pursuant to which CSFB, subject to the conditions contained therein, purchased all of the shares of the New Preferred Stock which were not otherwise distributed under the Plan.
Cumulative annual dividend rate of $102.50 per share payable annually in arrears on the last day of January in each year by issuance of cash or additional shares of New Preferred Stock.
During 1998, the Company continued to experience adverse loss ratios and declining persistency on its old Medical Expense and Medicare Supplement products, although the loss ratios for 1998 reflected an improvement over 1997. As a result of these factors, the Company undertook a further revaluation of the recoverability of DPAC in the third quarter of 1998. Based on the results of this review, the Company determined that an additional premium deficiency existed and recorded a non-cash charge to expense of approximately $5.0 million in the third quarter of 1998. This adjustment had no impact on the Company's cash position or on the statutory capital and surplus of the Insurance Subsidiaries.