American Medical Security Group, Inc., through its subsidiary companies (the "Company"), is a provider of individual and small employer group insurance products. The Company's principal product offerings are medical insurance for small employer groups and medical insurance marketed to individuals and their families ("MedOne(R)"). The Company also offers dental, life, prescription drug, disability and accidental death insurance, and provides self-funded benefit administration. The Company has two reportable segments: health insurance products (which accounted for approximately 98% of the Company's total premium revenues in 2003 and 2002) and life insurance products. The Company markets its products in 32 states and the District of Columbia through independent agents. The Company has approximately 75 sales managers and representatives located in sales offices throughout the United States to support the independent agents. The Company's products generally provide discounts to members that utilize preferred provider organizations with which the Company contracts.
The Company reported income from continuing operations of $28.6 million or $2.03 per diluted share for the twelve months ended December 31, 2003. This compares to income from continuing operations of $23.1 million or $1.67 per diluted share for 2002. The results for 2003 include net realized gains from the sale of investment securities of $1.2 million (after-tax) or $0.08 per diluted share. The improvement in profitability from the prior year resulted from the Company's continued efforts to effectively manage administrative expenses and claims costs. The Company's health segment expense ratio improved considerably in 2003, compared to the prior year, due to a focused effort to control administrative costs during a period of declining revenues. The Company's health segment loss ratio also improved from the prior year as a result of disciplined pricing, a cost-effective product portfolio and a strategic focus on markets with the greatest prospects for profitability and future growth.
Although the expected positive results of these actions on revenue and membership have been tempered somewhat by an economy that is slow to recover, the Company has experienced recent trends that indicate the growth initiatives may be starting to take hold. During 2003, new medical member enrollment improved each quarter while termination rates on existing membership declined. As a result, the Company reported improved membership and revenue during the fourth quarter of 2003 compared to the previous quarter.
Other revenue, which primarily consists of administrative fee income from claim processing on self funded business and other administrative services, decreased to $16.8 million in 2002 from $17.6 million in 2001. The decrease resulted from the decrease in membership during 2002.
The Company had no off-balance sheet arrangements as of December 31, 2003.
In 2002, the Company was subject to negative national publicity surrounding its MedOne(R) rating practices and related legal matters, which management believes harmed the Company's MedOne(R) new member enrollment during the last half of 2002. The Company changed its rating practices in all MedOne(R) markets effective January 1, 2003. Adverse publicity about the Company's rating practices or other matters in the future may affect sales of the Company's products, which could impede the Company's growth plans.
The Company's investments are classified in three categories. Investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and are reported at amortized cost. Assets which are invested for the purpose of supporting the Company's nonqualified executive retirement plan are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings as net investment income. All other investments are classified as available-for-sale securities and are reported at fair value based on quoted market prices. Unrealized gains and losses on available-for-sale securities are excluded from earnings and reported as a separate component of shareholders' equity as accumulated other comprehensive income or loss, net of income tax effects.
The Company recognizes premium deficiency reserves on an existing group of insurance contracts when the sum of expected future claim costs, claim adjustment expenses and related maintenance expenses exceeds the expected future premium revenue and investment income. Insurance contracts are grouped using a methodology consistent with the Company's manner of acquiring, servicing and measuring the profitability of its business. The Company continues to evaluate assumptions used in the premium deficiency reserve analysis and records or adjusts premium deficiency reserves as necessary. As of December 31, 2003 and 2002, no premium deficiency reserves were required.
The Company follows Accounting Principles Board Opinion No. 25, the intrinsic value method of accounting for stock-based compensation, where no compensation expense is recorded when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. The following table illustrates the pro forma net income and pro forma net income per share as if the Company had followed the fair value method of accounting for stock-based compensation under Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123").
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
Balance at January 1 $ 126,477 $ 128,330 $ 134,690 Less reinsurance recoverables 312 1,351 476 - -------------------------------------------------------------------------------- Net balance at January 1 126,165 126,979 134,214