SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to____
Commission File Number 1-8538
ASCENT ASSURANCE, INC.
(Exact Name of Registrant as Specified in its Charter)
| DELAWARE | 73-1165000 | ||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) | ||
| 3100 Burnett Plaza, Unit 33, 801 Cherry Street, Fort Worth, Texas |
76102 | ||
| (Address of Principal Executive Offices) | (Zip Code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive Proxy Statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes No X
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes No X
The aggregate market value of voting stock held by non-affiliates of the Registrant amounted to $1,633,963 as of February 25, 2004. As of February 25, 2004, 6,535,850 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement for the 2004 Annual Meeting, to be filed with the securities and Exchange Commission on or before April 30, 2004, are incorporated by reference under part III of this Form 10-K.
| PART I | Page Number | |
| ITEM 1. | Business | 3 |
| ITEM 2. | Properties | 9 |
| ITEM 3. | Legal Proceedings | 10 |
| ITEM 4. | Submission of Matters to a Vote of Security Holders | 10 |
| PART II | ||
| ITEM 5. | Market for the Registrant's Common Stock and Related Stockholder Matters | 11 |
| ITEM 6. | Selected Consolidated Financial Data | 12 |
| ITEM 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 |
| ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | 27 |
| ITEM 8. | Financial Statements and Supplementary Data | 29 |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 66 |
| ITEM 9A. | Controls and Procedures | 66 |
| PART III | ||
| ITEM 10. | Directors and Executive Officers of the Registrant | 67 |
| ITEM 11. | Executive Compensation | 67 |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder | |
| Matters | 67 | |
| ITEM 13. | Certain Relationships and Related Transactions | 67 |
| ITEM 14. | Principal Accountant Fees and Services | 67 |
| PART IV | ||
| ITEM 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 68 |
Ascent Assurance, Inc. (“Ascent”) is the successor to a Delaware company originally incorporated in 1982 as an insurance holding company. Ascent, through its applicable subsidiaries, 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 or reinsured by its wholly-owned life and health insurance 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”. The Insurance Subsidiaries are licensed to conduct business in 40 states and the District of Columbia. Each of the following states accounted for more than 5% of premium revenue for the year ended December 31, 2003: Florida — 18%, Texas — 13 %, Colorado — 8%, and Oklahoma — 6%.
The Company, through applicable subsidiaries, also derives fee and service revenue from (i) telemarketing services, (ii) printing services and (iii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iv) commissions on the sale of the benefits of unaffiliated membership benefit programs.
NationalCare® Marketing, Inc. (“NCM”), a wholly-owned subsidiary, is the principal distribution channel for the products of NFL and FLICA. NCM maintains an agency force that is organized by geographic region. All members of NCM’s agency force are independent contractors and all compensation received is based upon sales production and the persistency of such production. NCM’s agents market the insurance products of NFL and FLICA on a one-to-one basis to individuals who are either, not covered under group insurance protection normally available to employees of business organizations or, who wish to change or supplement existing coverage.
Sales leads for NCM’s agents are generated principally by the Company’s tele-survey subsidiary, Precision Dialing Services (“PDS”). By utilizing a predictive automated dialing system, PDS is able to generate quality sales leads that maintain the efficiency of NCM’s agency force. By providing these sales leads, NCM believes that its ability to attract experienced agents as well as new agents is enhanced.
The Company’s operations are comprised of one segment, Accident and Health insurance. The principal products currently underwritten by NFL and FLICA are medical expense reimbursement and supplemental policies. These products are designed with flexibility as to benefits, deductibles, coinsurance and premiums. The principal product groups currently underwritten by NFL and FLICA are summarized below:
| Comprehensive major medical products — These products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of inpatient medicines. The policies provide a number of options with respect to annual deductibles, coinsurance percentages and maximum benefits. After the annual deductible is met, the insured is generally responsible for a percentage of eligible expenses up to a specified annual stop-loss limit. Thereafter, the remainder of eligible expenses incurred during the calendar year by such insured is covered up to certain maximum aggregate policy limits. All such products are guaranteed renewable pursuant to the provisions of the Health Insurance Portability and Accountability Act, 42 U.S.C. § 300 et seq. (“HIPAA”). |
| Hospital/surgical medical expense products — These products are similar to comprehensive major medical products except that benefits are generally limited to medical and surgical services received in a hospital either as an inpatient or outpatient (services such as outpatient physician office visits and outpatient prescription drugs are excluded) and deductibles and coinsurance provisions are generally higher. All such products are also guaranteed renewable pursuant to HIPAA. |
| Supplemental specified disease products — These products include blanket group accident coverages, blanket group hospital daily indemnity coverages, as well as individual indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and “event specific” individual policies, which provide fixed benefits or lump sum payments directly to the insured upon diagnosis of certain types of internal cancer or heart disease. Blanket group accident and hospital daily indemnity insurance coverages are generally not guaranteed renewable by contract, and are exempt from the guaranteed renewability provisions of HIPAA. Individual hospital indemnity and specified disease products are generally guaranteed renewable by contract, but are exempt from the guaranteed renewability provisions of HIPAA. |
Major medical and hospital surgical medical expense products comprise approximately 99% of new business sales. These products are individually underwritten based upon medical information provided by the applicant prior to issue. Information provided in the application is verified with the applicant through a tape-recorded telephone conversation or through written correspondence. In addition, the underwriting procedures for major medical products currently sold by NFL and FLICA include a para-med examination or other medical tests, depending on the age of the applicant.
Prior to 1998, some of the Insurance Subsidiaries also underwrote Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. Such Insurance Subsidiaries continue to receive renewal premiums on Medicare Supplement policies sold prior to that date.
See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of premium revenue by product.
The accident and health insurance industry is highly competitive and includes a large number of insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines, favorable ratings from A.M. Best Company, Inc. (“A.M. Best”) and larger staffs than the Company. Competitive factors applicable to the Insurance Subsidiaries’ business include product mix, policy benefits, service to policyholders and premium rates. The Insurance Subsidiaries believe that their current benefits and premium rates are generally competitive with those offered by other companies. Management believes that service to policyholders and prompt and fair payment of claims continue to be important factors in the Insurance Subsidiaries’ ability to remain competitive. The Insurance Subsidiaries are not currently rated with A.M. Best. The Company believes that the Insurance Subsidiaries lack of an A.M. Best rating is not a significant factor affecting the ability to sell products in the markets served.
Private insurers and voluntary and cooperative plans, such as Blue Cross and Blue Shield and HMOs, provide various alternatives for defraying hospitalization and medical expenses. Much of this health coverage is sold on a group basis to employer-sponsored groups. The federal and state governments also provide programs for the payment of the costs associated with medical care through Medicare and Medicaid. These major medical programs generally cover a substantial amount of the medical expenses incurred as a result of accidents or illnesses. The Insurance Subsidiaries’ major medical products are designed to provide coverage, which is similar to these major medical insurance programs, but are sold primarily to persons not covered by an employer-sponsored group.
The Insurance Subsidiaries’ supplemental specified disease products are designed to provide coverage which is supplemental to major medical insurance and may be used to defray non-medical as well as medical expenses. Since these policies are sold to complement major medical insurance, the Insurance Subsidiaries compete only indirectly with those insurers providing major medical insurance, however, other insurers may expand coverage in the future, which could reduce future sales levels and profit margins. Medicare supplement products are designed to supplement the Medicare program by reimbursing for expenses not covered by such program. Future government programs may impact the rate of participation by private entities in such government programs.
In addition to product and service competition, there is also very strong competition within the accident and health insurance market for qualified, effective agents. The recruitment and retention of such agents is important to the success and growth of the Company’s business. Management believes that NCM is competitive with respect to the recruitment, training and retention of such agents. However, there can be no assurance that NCM will be able to continue to recruit or retain qualified, effective agents.
General. The Company and its Insurance Subsidiaries are subject to regulation and supervision in all jurisdictions in which they conduct business. In general, state insurance laws establish supervisory agencies with broad administrative powers relating to, among other things, the granting and revoking of licenses to transact business, regulation of trade practices, premium rate levels, premium rate increases, licensing of agents, approval of content and form of policies, maintenance of specified minimum statutory reserves and statutory capital and surplus, deposits of securities, form and content of required financial statements, nature of investments and limitations on dividends to stockholders. The purpose of such regulation and supervision is primarily to provide safeguards for policyholders rather than to protect the interests of stockholders.
The National Association of Insurance Commissioners (“NAIC”) is a voluntary association of all of the state insurance commissioners in the United States. The primary function of the NAIC is to develop model laws on key insurance regulatory issues that can be used as guidelines for individual states in adopting or enacting insurance legislation. While the NAIC model laws are accorded substantial deference within the insurance industry, these laws are not binding on insurance companies unless enacted into state law and variations from the model laws from state to state are common.
The Insurance Subsidiaries are all domiciled in Texas and are therefore subject to regulation under Texas laws. The State of Texas has enacted insurance holding company laws that require registration and periodic reporting by insurance companies. Such legislation typically places restrictions on, or requires prior notice or approval of, certain transactions between insurers and other companies within the holding company system, including, without limitation, dividend payments from insurance subsidiaries and the terms of loans and transfers of assets within the holding company structure.
Product Approvals. Generally, before an insurance company is permitted to market an individual insurance product in a particular state, it must obtain regulatory approval from that state and adhere to that state’s insurance laws and regulations which include, among other things, specific requirements regarding the form, language, premium rates and policy benefits of that product. Consequently, although the Insurance Subsidiaries’ policies generally provide for the same basic types and levels of coverage in each of the states in which they are marketed, the policies are not precisely identical in each state or other jurisdiction in which they are sold. Such regulation may delay the introduction of new products and may impede, or impose burdensome conditions on, rate increases or other actions that the Insurance Subsidiaries may wish to take in order to enhance their operating results. In addition, federal or state legislation or regulatory pronouncements may be enacted that may prohibit or impose restrictions on the ability to sell certain types of insurance products or impose other restrictions on the Company’s operations. For example, certain states in which the Insurance Subsidiaries do business have adopted NAIC model statutes and regulations relating to market conduct practices of insurance companies. Any limitations or other restrictions imposed on the Insurance Subsidiaries’ market conduct practices by the regulators of a state that has adopted the model statutes and regulations may also be imposed by the regulators in other states that have adopted such statutes and regulations. No assurances can be given that future legislative or regulatory changes will not adversely affect the Company’s business, financial condition or results of operations.
In addition, state insurance departments generally require the maintenance of certain minimum loss ratios on certain product lines. The states in which the Insurance Subsidiaries are licensed have the authority to change the minimum mandated statutory loss ratios to which the Insurance Subsidiaries are subject, the manner in which these ratios are computed and the manner in which compliance with these ratios is measured and enforced. Most states in which the Insurance Subsidiaries write health insurance products have adopted the loss ratios recommended by the NAIC. The Company is unable to predict the impact of (i) any changes in the mandatory statutory loss ratios relating to products offered by the Insurance Subsidiaries or (ii) any change in the manner in which these minimums are computed or enforced in the future. Similarly, the Insurance Subsidiaries’ ability to increase its premium rates in response to adverse loss ratios is subject to regulatory approval. Failure to obtain such approval could have a material adverse effect on the Company’s business, financial condition and results of operations.
NAIC Accounting Principles. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles which became the NAIC’s primary guidance on statutory accounting. The Texas Department of Insurance adopted the Codification effective January 1, 2001. Statutory accounting practices (“SAP”) differ in some respects from accounting principles generally accepted in the United States (“GAAP”). The significant differences are:
| o | Policy acquisition costs, which consist of commissions and other costs incurred in connection with acquiring new business, are charged to current operations as incurred for SAP, whereas, under GAAP these costs are deferred and amortized over the policy term in order to provide an appropriate matching of revenue and expense. |
| o | Future policy benefit reserves are based on statutory mortality, morbidity and interest requirements for SAP, while GAAP reserves are based on Company or industry experience. |
| o | Similar to GAAP, deferred income taxes are provided on temporary differences between the statutory and tax bases of assets and liabilities for SAP; however, statutory deferred tax assets are limited based upon admission tests. Under SAP, the change in deferred taxes is recorded directly to surplus as opposed to GAAP where the change is recorded to current operations. |
| o | Debt securities are carried at amortized cost for SAP. Under GAAP, investments in debt securities are classified, as held-to-maturity, available-for-sale, or trading securities, and the accounting treatment is different for each category. Life and health insurance companies are required to record an Interest Maintenance Reserve (“IMR”) to defer gains and losses resulting from the sale of debt securities prior to maturity. For SAP the IMR is amortized into income over the original maturity of the investment. Under GAAP, realized gains and losses are recorded in the income statement during the period in which the investment is sold. |
Risk-Based Capital. The NAIC’s Risk-Based Capital for Life and/or Health Insurers Model Act (the “Model Act”) provides a tool for insurance regulators to determine the levels of statutory capital and surplus an insurer must maintain in relation to its insurance and investment risks and whether there is a need for possible regulatory attention. The Model Act (or similar legislation or regulation) has been adopted in states where the Insurance Subsidiaries are domiciled. The Model Act provides four levels of regulatory attention, varying with the ratio of the insurance company’s total adjusted capital (defined as the total of its statutory capital and surplus, asset valuation reserve and certain other adjustments) to its authorized control level risk-based capital (“RBC”):
| o | If a company’s total adjusted capital is less than or equal to 200 percent but greater than 150 percent of its RBC, (the “Company Action Level”), the company must submit a comprehensive plan aimed at improving its capital position to the regulatory authority proposing corrective actions. |
| o | If a company’s total adjusted capital is less than or equal to 150 percent but greater than 100 percent of its RBC (the “Regulatory Action Level”), the regulatory authority will perform a special examination of the company and issue an order specifying the corrective actions that must be followed. |
| o | 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. |
| o | If a company’s total adjusted capital is less than or equal to 70 percent of its RBC (the “Mandatory Control Level”), the regulatory authority must place the company under its control. |
The Texas Department of Insurance adopted the NAIC’s RBC Model Act during 2000. NFL’s and FLICA’s statutory annual statements for the year ended December 31, 2003 filed with the Texas Department of Insurance reflected 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, 2003, AICT’s RBC exceeded Company Action Level RBC; however, NFIC’s RBC only exceeded Regulatory Action Level RBC. Both NFIC and AICT are in compliance with the terms of the voluntary consent order.
Premium-Writing Ratios. Under Florida Statutes Section 624.4095, Florida licensed insurance companies’ ratio of actual or projected annual written premiums to current or projected surplus with 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. Only FLICA writes comprehensive major medical and hospital/surgical medical expense new business in Florida; however, Florida production represents approximately 31% of the Company’s consolidated new business sales. At December 31, 2003, the premium-writing ratio for FLICA complied with the limit mandated by Florida law.
Dividends. Dividends paid by the Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the Texas Department of Insurance. Generally, the Texas Insurance Code allows life and health insurance companies to make dividend payments from surplus profits or earned surplus arising from its business. Earned surplus is defined as unassigned surplus excluding any unrealized gains. Texas life and health insurance companies may generally pay ordinary dividends or make distributions of cash or other property in the current twelve month period with a fair market value equal to or less than the greater of 10% of surplus as regards policyholders as of the preceding December 31 or the net gain from operations for the twelve month period ending on the preceding December 31. Dividends exceeding the applicable threshold are considered extraordinary and require the prior approval of the Texas Insurance Commissioner.
The Insurance Subsidiaries are precluded from paying dividends during 2004 without prior approval of the Texas Insurance Commissioner, as the companies’ earned surplus is negative. Due to statutory losses incurred by the Insurance Subsidiaries in prior years, the Company does not expect to receive any dividends from the Insurance Subsidiaries for the foreseeable future.
Guaranty Associations. The Insurance Subsidiaries may be required, under the solvency or guaranty laws of most states in which they do business, to pay assessments (up to prescribed limits) to fund policyholder losses or liabilities of insurance companies that become insolvent. Non-affiliated insurance company insolvencies increase the possibility that such assessments may be required. These assessments may be deferred or forgiven under most guaranty laws if they would threaten an insurer’s financial strength and, in certain instances, may be offset against future premium taxes. The incurrence and amount of such assessments may increase in the future without notice. The Insurance Subsidiaries pay the amount of such assessments as they are incurred. Assessments that cannot be offset against future premium taxes are charged to expense. Assessments that qualify for offset against future premium taxes are capitalized and are offset against such future premium taxes. As a result of such assessments, the Insurance Subsidiaries paid approximately $20,000 during the year ended December 31, 2003.
HIPAA. This federal regulation, among other things, mandates the adoption of standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and the efficiency of the healthcare industry. This legislation also promotes so-called “accountability” by requiring compliance with certain privacy and security standards in connection with individually identifiable protected health information of certain individuals. Another key component is “portability”, or an individual’s right, under certain circumstances, to satisfy waiting periods or pre-existing coverage limitations contained in an individual policy form providing new coverage for such individual, as a result of the length of time such individual was covered under a prior group health plan.
In December 2000, final regulations were issued regarding the privacy of individually identifiable health information. This final rule on privacy applies to both electronic and paper records and imposes extensive requirements on the way in which health care providers, health plan sponsors, health insurance companies, and their business associates use and disclose protected information. Under the new HIPAA privacy rules the Company is now required to (a) comply with a variety of requirements concerning its use and disclosure of individuals’ protected health information, (b) establish rigorous internal procedures to protect health information, and (c) enter into business associate contracts with other companies that use similar privacy protection procedures. The final rules do not provide for complete federal preemption of state laws, but, rather, preempt all contrary state laws unless the state law is more stringent. The effective date of the rules was April 14, 2003.
In February 2003, rules were published related to the security of electronic health data, including individual health information and medical records, for health plans, health care providers, and health care clearinghouses that maintain or transmit health information electronically. The rules would require these businesses to establish and maintain confidentiality of this information. The standards embraced by these rules include the implementation of technical and organization policies, practices and procedures for security and confidentiality of health information and protecting its integrity, education and training programs, authentication of individuals who access this information, systems controls, physical security and disaster recovery systems, protection of external communications and use of electronic signatures. The rules were effective April 23, 2003. Most covered entities have until April 25, 2005 to comply.
Sanctions for failing to comply with HIPAA standards include criminal penalties of up to $250,000 per violation and civil sanctions of up to $25,000 per violation. Due to the complex nature of the privacy regulations, they may be subject to court challenge, as well as further legislative and regulatory actions that could alter their effect. The Company believes that it is in compliance with the effective HIPAA regulations.
GLBA. The Financial Services Modernization Act of 1999 (the “Gramm-Leach-Bliley Act”, or “GLBA”) contains privacy provisions and introduced new controls over the transfer and use of individuals’ nonpublic personal data by financial institutions, including insurance companies, insurance agents and brokers licensed by state insurance regulatory authorities. Numerous pieces of federal and state legislation aimed at protecting the privacy of nonpublic personal financial and health information are pending. The privacy provisions of GLBA that became effective in July 2001 require companies to provide written notice of its privacy practices to all of the Company’s insureds. In addition, the Company provides insureds with an opportunity to state their preferences regarding the Company’s use of their non-public personal information.
GLBA provides that there is no federal preemption of a state’s insurance related privacy laws if the state law is more stringent than the privacy rules imposed under GLBA. Pursuant to the authority granted under GLBA to state insurance regulatory authorities to regulate, the National Association of Insurance Commissioners promulgated a new model regulation called Privacy of Consumer Financial and Health Information Regulation, which was adopted by numerous state insurance authorities. The Company believes that it is in compliance with the privacy regulations that became effective in 2001.
The health care industry, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Proposals that have been considered include income tax credits for certain individuals, cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, patients’ bills of rights and requirements that all businesses offer health insurance coverage to their employees. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse affect on the business, financial condition or results of the operations of the Company and its subsidiaries.
At December 31, 2003, the Company employed 247 persons. The Company has not experienced any work stoppages, strikes or business interruptions as a result of labor disputes involving its employees, and the Company considers its relations with its employees to be good.
The Company’s principal offices are located at 801 Cherry Street, Unit 33, 3100 Burnett Plaza, Fort Worth, Texas. The lease for this facility expires February 28, 2011. Westbridge Printing Services, Inc., the Company’s wholly-owned printing subsidiary, maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas, under a lease agreement which expires in October, 2005. Precision Dialing Services (“PDS”), the Company’s wholly-owned telemarketing subsidiary, maintains its facility at 9550 Forest Lane, Dallas, Texas under a lease agreement which expired in December 2003. In March 2004, PDS will relocate to a facility at 1100 East Campbell Road, Richardson, Texas, under a lease agreement which expires in March 2009. 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.
In the normal course of its business operations, the Company is involved in various claims and other business related disputes. In the opinion of Management, the Company is not a party to any pending litigation which is reasonably likely to have an adverse result or disposition that would have a material adverse effect on the Company’s business consolidated financial position or its consolidated results of operations.
There were no matters submitted by the Company to a vote of stockholders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year for which this report is filed.
Price Range of Publicly Traded Securities. The Company’s Common Stock and Warrants are quoted on the over-the-counter bulletin board (“OTC Bulletin Board”). There were 6,535,850 shares of Common Stock and 971,266 Warrants outstanding as of February 25, 2004. The high and low price listed for the Common Stock and Warrants reflects the OTC Bulletin Board closing bid prices of the Company’s securities. The closing bid price on December 31, 2003 was $0.15. There were approximately 310 shareholders of record on December 31, 2003, representing approximately 1,175 beneficial owners.
| OTC Bulletin Board | ||||||||||||||||
| Common Stock | Warrant | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| 2003 | ||||||||||||||||
| Fourth Quarter | $ | 0.35 | $ | 0.15 | $ | 0.050 | $ | 0.001 | ||||||||
| Third Quarter | 0.60 | 0.35 | 0.005 | 0.001 | ||||||||||||
| Second Quarter | 0.52 | 0.35 | 0.006 | 0.005 | ||||||||||||
| First Quarter | 0.72 | 0.30 | 0.005 | 0.005 | ||||||||||||
| 2002 | ||||||||||||||||
| Fourth Quarter | $ | 0.80 | $ | 0.45 | $ | 0.015 | $ | 0.005 | ||||||||
| Third Quarter | 1.25 | 0.60 | 0.012 | 0.012 | ||||||||||||
| Second Quarter | 1.11 | 0.60 | 0.020 | 0.011 | ||||||||||||
| First Quarter | 1.13 | 0.57 | 0.050 | 0.011 | ||||||||||||
Dividend Policy
The Company does not anticipate declaring or paying cash dividends on its Common Stock in the foreseeable future. For information concerning statutory limitations on the payment of dividends to the Company by the Insurance Subsidiaries and further discussion of the Company’s results of operations and liquidity, see ITEM 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, ITEM 1 — “Business — State Regulation”, and NOTE 11 — “Statutory Capital And Surplus” to the Company’s Consolidated Financial Statements at Item 8.
Reservation of Common Stock
There are 971,266 shares of common stock reserved for issuance upon exercise of warrants. The warrants are exercisable at an initial exercise price of $9.04 share of common stock, subject to customary anti-dilution adjustments, and will expire on March 24, 2004.
Up to 1,219,585 shares of the fully diluted number of shares of common stock have been reserved for issuance to employees, directors and former directors, and up to 387,119 shares of the fully diluted number of shares of common stock have been reserved for issuance to the Company’s marketing agents under the Company’s 1999 Stock Option Plan, which was approved by the Company’s shareholders. For information concerning the Company’s equity compensation plans, see Note 12 – “Employee Benefit Plans” to the Company’s Consolidated Financial Statements at Item 8 and Item 12 – “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”.
The information set forth below was derived from the Consolidated Financial Statements of the Company. The information set forth below should be read in conjunction with ITEM 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company and related notes.
Year Ended December 31,
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Nine Months Ended December 31,
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2003
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2002
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2001
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2000
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1999(4)
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| (in thousands, except per share data) | |||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||
| Premiums | $ | 101,574 | $ | 111,048 | $ | 125,206 | $ | 119,908 | $ | 86,371 | |||||||
| Total revenues | 121,222 | 131,278 | 155,381 | 149,586 | 105,972 | ||||||||||||
| (Loss) income before income taxes | (1,348 | ) | (931 | ) | (2,119 | ) | (12,939 | ) | 3,231 | ||||||||
| Net (loss) income(1) | (1,348 | ) | (931 | ) | (2,119 | ) | (18,942 | ) | 2,106 | ||||||||
| Preferred stock dividends | 1,759 | 3,263 | 2,932 | 2,576 | 1,874 | ||||||||||||
| (Loss) income applicable to common | |||||||||||||||||
| shareholders | (3,107 | ) | (4,194 | ) | (5,051 | ) | (21,518 | ) | 232 | ||||||||
| (Loss) Earnings Per Share(1): | |||||||||||||||||
| Basic | $ | (0.48 | ) | $ | (0.64 | ) | $ | (0.78 | ) | $ | (3.31 | ) | $ | 0.04 | |||
| Diluted | $ | (0.48 | ) | $ | (0.64 | ) | $ | (0.78 | ) | $ | (3.31 | ) | $ | 0.04 | |||
| Weighted Average Shares Outstanding: | |||||||||||||||||
| Basic | 6,531 | 6,505 | 6,500 | 6,500 | 6,500 | ||||||||||||
| Diluted | 6,531 | 6,505 | 6,500 | 6,500 | 6,610 | ||||||||||||
2003
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2002
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2001
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2000
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1999
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| (in thousands) | |||||||||||||||||
| Balance Sheet Data: | |||||||||||||||||
| Cash and invested assets | $ | 105,239 | $ | 112,174 | $ | 116,238 | $ | 112,235 | $ | 115,303 | |||||||
| Total Assets | 143,929 | 155,440 | 162,593 | 160,478 | 163,690 | ||||||||||||
| Policy liabilities | 81,068 | 91,559 | 98,773 | 104,084 | 95,895 | ||||||||||||
| Notes payable(2) | 15,770 | 18,189 | 18,603 | 8,947 | 7,162 | ||||||||||||
| Total liabilities | 106,598 | 119,283 | 129,136 | 128,698 | 116,649 | ||||||||||||
| Redeemable convertible preferred stock(3) | - | 33,896 | 30,635 | 27,705 | 23,257 | ||||||||||||
| Stockholders' equity(3) | 37,331 | 2,261 | 2,822 | 4,075 | 23,784 | ||||||||||||
| (1) | 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. See "Critical Accounting Policies - Deferred Tax Asset" at Item 7. | |
| (2) | In April 2001, the Company borrowed an additional $11 million. See "Liquidity, Capital Resources, and Statutory Capital and Surplus" at Item 7. | |
| (3) | On December 31, 2003, 36,567 shares plus accrued dividends equal to 937 shares of 10.25% Series A Convertible Preferred Stock were exchanged for 37,504 shares of 5.5% Series B Convertible Preferred Stock. Stockholders' equity at December 31, 2003 includes $37.5 million of 5.5% Series B Convertible Preferred Stock. | |
| (4) | Ascent's predecessor, Westbridge Capital, Corp., filed Chapter 11 reorganization proceedings on September 16, 1998. Ascent emerged from such proceedings on March 24, 1999. Statement of operations data for the three months ended March 1999 for Westbridge Capital Corp. is not comparable to data for subsequent periods of Ascent and is therefore omitted. | |
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, through its applicable subsidiaries, is principally engaged in the development, marketing, underwriting, and administration of medical expense and supplemental health insurance products. 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. The Company, through applicable subsidiaries, also derives fee and service revenue from (i) tele-survey services, (ii) printing services, and (iii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iv) commissions on the sale of the benefits of unaffiliated membership benefit programs. See Item 1 – “Business” for a discussion of the Company’s marketing distribution system, health insurance products, and market competition.
The following discussion provides management’s assessment of operating results and material changes in financial position and liquidity for the Company. This discussion is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. Certain reclassifications of prior years’ amounts have been made to conform with the 2003 presentation.
Forward-Looking Statements. Statements contained in this analysis and elsewhere in this document that are not based on historical information are forward-looking statements and are based on management’s projections, estimates and assumptions. In particular, forward-looking statements can be identified by the use of words such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, or similar words. Management cautions readers regarding its forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Various 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 Ascent’s management 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.
Important factors known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report include, but are not limited to:
| o | any limitation imposed on the Insurance Subsidiaries’ ability to control the impact of rising health care costs, especially prescription drugs, and rising medical service utilization rates through product and benefit design, underwriting criteria, premium rate increases, utilization management and negotiation of favorable provider contracts; |
| o | the impact of changing health care trends on the Insurance Subsidiaries’ ability to accurately estimate claim and settlement expense reserves; |
| o | the ability of the Company to fund competitive commission advances to its agents from internally generated cash flow or external financing; |
| o | 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; |
| o | Ascent’s ability to make additional investment in its Insurance Subsidiaries in the form of capital contributions, if needed, in order for such subsidiary to comply with regulatory capital or debt covenant requirements; |
| o | default by issuers of fixed maturity investments owned by the Insurance Subsidiaries; and |
| o | the loss of key management personnel. |
Subsequent written or oral statements attributable to Ascent or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Report and those in the Company’s reports previously filed with the SEC. Copies of these filings may be obtained by contacting Ascent or the SEC.
The Company’s accounting policies are more fully described in Note 2 of the Consolidated Financial Statements at Item 8. The Company believes that the following discussion addresses the Company’s most significant accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments. The Company’s significant accounting policies relate to revenue recognition, investments, agent receivables, deferred policy acquisition costs, deferred tax assets, claim reserves, future policy benefit reserves, reinsurance and statutory accounting practices. The application of these accounting policies requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities and expenses in the Company’s consolidated financial statements. Such estimates and judgments are based on historical experience, changes in laws and regulations, observance of industry trends, and various information received from third parties. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported consolidated financial statement amounts are appropriate in the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.
Revenue Recognition. Premium revenues from insurance contracts are recognized when due from policyholders. Policies for which premium has not been received within the applicable grace period from the due date are cancelled. Fee and service income is recognized when earned, the services have been provided and collectibility is reasonably assured.
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 insurance 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.
Investment policy is determined by the applicable Board of Directors of the Company and each of the Insurance Subsidiaries. The Company’s current investment policy is to balance its portfolio between long-term and short-term investments so as to achieve long-term returns consistent with the preservation of capital and maintenance of adequate liquidity to meet the payment of the Company’s policy benefits and claims. The current schedule of the Company’s invested asset maturities corresponds with the Company’s expectations regarding anticipated cash flow payments based on the Company’s policy benefit and claim cycle, which the Company believes is medium term in nature. The Company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. Also, up to 5% of the Company’s fixed maturity securities may be invested in higher yielding, non-investment grade securities. The Company’s entire fixed maturity portfolio is classified as “available for sale” and carried at market value.
The following table provides information on the Company’s fixed maturity investments, in thousands, as of December 31: