UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 661-1111
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, outstanding as of October 31, 2001:
13,952,689 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000.................3
Condensed Consolidated Statements of Operations
Three months ended September 30, 2001 and 2000;
Nine months ended September 30, 2001 and 2000............5
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000............6
Notes to Condensed Consolidated Financial Statements
September 30, 2001.......................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................17
Item 2. Changes in Securities and Use of Proceeds...................18
Item 6. Exhibits and Reports on Form 8-K............................18
Signatures...............................................................19
Exhibit Index..........................................................EX-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
-----------------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 258,181 $ 262,428
Equity securities-preferred 2,459 2,368
Fixed maturity securities held to maturity, at amortized cost 4,295 4,320
Trading securities, at fair value 388 260
-----------------------------------
Total investments 265,323 269,376
Cash and cash equivalents 23,307 15,606
Other assets:
Property and equipment, net 32,756 32,451
Goodwill and other intangibles, net 104,841 107,562
Other assets 41,172 46,928
-----------------------------------
Total other assets 178,769 186,941
-----------------------------------
Total assets $ 467,399 $ 471,923
===================================
See Notes to Condensed Consolidated Financial Statements
3
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
-----------------------------------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 132,028 $ 145,310
Advance premiums 16,135 17,568
Payables and accrued expenses 30,358 25,902
Notes payable 40,358 41,258
Other liabilities 21,518 20,708
-----------------------------------
Total liabilities 240,397 250,746
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 13,954,189 outstanding at September 30, 2001,
16,654,315 issued and 14,270,945 outstanding at December 31, 2000) 16,654 16,654
Paid-in capital 187,834 187,956
Retained earnings 36,125 36,295
Accumulated other comprehensive income (loss), net of tax benefit
(expense) of ($2,145,000) at September 30, 2001 and $2,126,000
at December 31, 2000 3,984 (3,948)
Treasury stock (2,700,126 shares at September 30, 2001
and 2,383,370 shares at December 31, 2000, at cost) (17,595) (15,780)
-----------------------------------
Total shareholders' equity 227,002 221,177
-----------------------------------
Total liabilities and shareholders' equity $ 467,399 $ 471,923
===================================
See Notes to Condensed Consolidated Financial Statements
4
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- --------------------------------
2001 2000 2001 2000
--------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Insurance premiums $ 204,399 $ 231,963 $ 640,514 $ 720,405
Net investment income 4,280 4,620 13,199 14,389
Realized investment losses (660) (90) (839) (202)
Other revenue 5,369 5,263 16,078 15,167
--------------------------------- --------------------------------
Total revenues 213,388 241,756 668,952 749,759
Expenses:
Medical and other benefits 144,000 180,141 466,754 550,216
Selling, general and administrative 61,513 61,060 195,797 188,682
Interest expense 687 890 2,307 2,669
Amortization of goodwill and intangibles 906 946 2,720 2,839
--------------------------------- --------------------------------
Total expenses 207,106 243,037 667,578 744,406
--------------------------------- --------------------------------
Income (loss) before income taxes 6,282 (1,281) 1,374 5,353
Income tax expense 2,778 95 1,544 2,810
--------------------------------- --------------------------------
Net income (loss) $ 3,504 $ (1,376) $ (170) $ 2,543
================================= ================================
Net income (loss) per common share:
Basic $ 0.25 $ (0.09) $ (0.01) $ 0.17
Diluted $ 0.25 $ (0.09) $ (0.01) $ 0.17
See Notes to Condensed Consolidated Financial Statements
5
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------------
2001 2000
---------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) $ (170) $ 2,543
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 7,757 7,325
Net realized investment losses 839 202
Increase in trading securities (128) (127)
Deferred income tax expense (benefit) (702) 5,261
Changes in operating accounts:
Other assets 2,186 11,825
Medical and other benefits payable (13,282) (32,098)
Advance premiums (1,433) 3,503
Payables and accrued expenses 4,456 2,515
Other liabilities 949 (9,553)
---------------------------------
Net cash provided by (used in) operating activities 472 (8,604)
INVESTING ACTIVITIES:
Purchases of available for sale securities (87,078) (13,838)
Proceeds from sale of available for sale securities 93,594 13,335
Proceeds from maturity of available for sale securities 8,030 2,645
Proceeds from maturity of held to maturity securities - 630
Purchases of property and equipment (4,349) (3,539)
Proceeds from sale of property and equipment 8 10
---------------------------------
Net cash provided by (used in) investing activities 10,205 (757)
FINANCING ACTIVITIES:
Issuance of common stock - 4
Purchase of treasury stock (2,102) (6,950)
Issuance of treasury stock 26 -
Borrowings under line of credit agreement - 39,158
Repayment on line of credit agreement - (39,158)
Repayment of notes payable (900) (965)
---------------------------------
Net cash used in financing activities (2,976) (7,911)
---------------------------------
Cash and cash equivalents:
Net increase (decrease) 7,701 (17,272)
Balance at beginning of year 15,606 17,266
---------------------------------
Balance at end of period $ 23,307 $ (6)
=================================
See Notes to Condensed Consolidated Financial Statements
6
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2001
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States ("GAAP") for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the American Medical Security Group, Inc. ("AMSG"
or the "Company") annual report on Form 10-K for the year ended December 31,
2000.
NOTE B. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding, adjusted for the
effect of dilutive employee stock options.
The following table provides a reconciliation of the number of weighted
average basic and diluted shares outstanding:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
Weighted average common
shares outstanding - basic 13,992,446 14,562,275 14,080,760 15,054,086
Effect of dilutive stock options 70,597 - - 87,624
-------------------------------- --------------------------------
Weighted average common 14,063,043 14,562,275 14,080,760 15,141,710
shares outstanding - diluted
================================ ================================
The effect of dilutive securities was excluded from the diluted earnings
(loss) per common share computation for the three months ended September 30,
2000 and the nine months ended September 30, 2001 because the Company had a net
loss in those periods, therefore their inclusion would have been antidilutive.
Certain options to purchase shares were not included in the computation of
diluted earnings (loss) per common share because the options' exercise prices
were greater than the average market price of the outstanding common shares for
the period.
7
NOTE C. COMPREHENSIVE INCOME
Comprehensive income is defined as net income (loss) plus or minus other
comprehensive income, which for the Company, under existing accounting
standards, includes unrealized gains and losses, net of income tax effects, on
certain investments in debt and equity securities. Comprehensive income for the
Company is calculated as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
Net income (loss) $ 3,504 $ (1,376) $ (170) $ 2,543
Change in unrealized gain/loss on
available for sale securities 4,944 2,634 7,932 2,752
-------------------------------- --------------------------------
Comprehensive income $ 8,448 $ 1,258 $ 7,762 $ 5,295
================================ ================================
NOTE D. DEBT
At September 30, 2001, the Company maintained a revolving bank line of
credit agreement ("Credit Agreement") with a maximum commitment of $35.2 million
and a $10.0 million sublimit for swingline loans. At September 30, 2001, the
outstanding balance of advances under the Credit Agreement was $35.2 million.
The Credit Agreement contains customary covenants which, among other matters,
require the Company to achieve minimum financial results and restrict the
Company's ability to incur additional debt, pay future cash dividends and
dispose of assets outside the ordinary course of business. The Credit Agreement
was amended in April 2001 to revise the Company's applicable interest rate on
outstanding loans and the schedule of mandatory future commitment reductions
including a $4.8 million maximum commitment reduction from $40.0 million to
$35.2 million on April 27, 2001. Revised future annual principal amounts due for
all of the Company's debt, including debt under the Credit Agreement, as of
September 30, 2001 are $0.3 million for 2001, $6.2 million for 2002, $11.2
million for 2003, $12.5 million for 2004, and $10.2 million for 2005.
NOTE E. CONTINGENCIES
On August 26, 1999, a $6.9 million verdict was entered against the Company
in a lawsuit filed by Skilstaf, Inc. which principally alleged breach of
contract involving the timing of claims payments. Following an adverse decision
from the Court of Appeals on March 12, 2001, the Company recognized an
additional accrual during the first quarter of 2001 representing the full
potential loss including punitive damages and other expenses. The Company
petitioned the United States Supreme Court to review the case. In July 2001, at
the direction of the district court, the Company paid the full amount of the
verdict plus interest. In October 2001, the United States Supreme Court denied
the Company's request to review the Court of Appeals' decision. The case is now
closed
On February 7, 2000, a $5.4 million verdict was entered against the Company
in a lawsuit filed by Health Administrators, Inc., an insurance agency owned and
operated by a former agent of the Company, which alleged breach of contract
involving commission amounts due to such agent. On March 29, 2001, the Ohio
Court of Appeals affirmed a portion of the verdict, with modifications,
representing approximately $3.0 million in damages, and reversed and remanded
the remaining issue in the case representing approximately $2.4 million in
damages. The Company appealed the $3.0 million portion of the damages to the
Ohio Supreme Court, which declined to take the appeal. Briefs have been
submitted for the remanded portion of the case and the parties are awaiting the
trial court's decision. Management believes that the Company has adequately
provided for losses that may result from this case.
8
The Company is involved in various other legal and regulatory matters
occurring in the normal course of its business. While the ultimate outcome of
the legal and regulatory matters cannot be determined at this time, in the
opinion of management, adequate provision has been made for losses which may
result from such matters; accordingly, the outcome of these matters is not
expected to have a material adverse effect on the consolidated financial
statements. The Company's financial results for the nine months ended September
30, 2001 reflect a first quarter pre-tax charge of $9.0 million ($5.9 million
after-tax) to cover estimated potential losses and related expenses for legal
related matters.
NOTE F. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS (the "Statements"), effective for fiscal
years beginning after December 15, 2001. Under the new rules, goodwill (and
intangible assets deemed to have indefinite lives) will no longer be amortized
but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. Based on the Company's current accounting policy of measuring
goodwill impairment based on undiscounted cash flows, there is no goodwill
impairment indicated.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statements is expected to result in an
increase in net income of approximately $2.4 million ($0.17 per share) per year.
The Company will perform the first of the required impairment tests of goodwill
and intangible assets deemed to have indefinite lives as of January 1, 2002 by
comparing the fair value of the Company's reporting units to their carrying
amounts (book value), including goodwill. In determining the fair value of the
Company's reporting units, management will consider valuation techniques such as
the quoted market price of the Company's stock, the present value of future cash
flows and market comparison of similar assets and liabilities. As of September
30, 2001, the Company's book value per share was significantly higher than the
quoted market value of a share of stock. The Company has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company. If it is determined that an impairment exists as of January 1, 2002,
the charge recognized would be reported as the cumulative effect of a change in
accounting principle in the Company's consolidated financial statements and
would have no impact on cash flows or the statutory basis capital and surplus of
the Company's insurance subsidiaries.
NOTE G. SEGMENT INFORMATION
The Company has two reportable segments: 1) health insurance products, and
2) life insurance products. The Company's health insurance products consist of
the following coverages related to small group preferred provider organization
products: MedOne (for individuals and families) and small group medical, self
funded medical, dental and short-term disability. Life products consist
primarily of group term-life insurance. The "All Other" segment includes
operations not directly related to the business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses). The reportable segments are managed separately because they
differ in the nature of the products offered and in profit margins.
The Company evaluates segment performance based on profit or loss before
income taxes, not including gains and losses on the Company's investment
portfolio. The accounting policies of the reportable segments are the same as
those used to report the Company's consolidated financial statements.
Intercompany transactions have been eliminated prior to reporting reportable
segment information.
9
A reconciliation of segment income (loss) before income taxes to
consolidated income (loss) before income taxes is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
Health segment $ 5,788 $ (3,956) $ (1,397) $ (2,692)
Life segment 1,615 2,006 4,963 7,036
All other (1,121) 669 (2,192) 1,009
-------------------------------- --------------------------------
Income (loss) before income taxes $ 6,282 $ (1,281) $ 1,374 $ 5,353
================================ ================================
Operating results and statistics for each of the Company's segments are as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premium $ 200,256 $ 222,635 $ 626,354 $ 684,026
Net investment income 2,299 2,243 7,014 7,141
Other revenue 4,370 4,220 12,957 12,203
-------------------------------- --------------------------------
Total revenues 206,925 229,098 646,325 703,370
Expenses:
Medical and other benefits 142,766 175,529 461,944 529,603
Selling, general and administrative 58,371 57,525 185,778 176,459
-------------------------------- --------------------------------
Total expenses 201,137 233,054 647,722 706,062
-------------------------------- --------------------------------
Income (loss) before income taxes $ 5,788 $ (3,956) $ (1,397) $ (2,692)
================================ ================================
FINANCIAL STATISTICS
Loss ratio 71.3% 78.8% 73.8% 77.4%
Expense ratio 27.0% 23.9% 27.6% 24.0%
-------------------------------- --------------------------------
Combined ratio 98.3% 102.7% 101.4% 101.4%
================================ ================================
Membership at End of Period:
Health:
Fully insured medical 363,912 475,706
Self funded medical 45,180 54,948
Stand-alone dental 171,214 176,727
--------------------------------
Total health 580,306 707,381
(a) Total health membership for the Company of 580,316 and 714,391 at
September 30, 2001 and 2000 includes HMO membership of 10 and 7,010,
respectively. HMO operations are not included in health segment
operating results.
10
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
LIFE SEGMENT
OPERATING RESULTS
REVENUES:
Insurance premiums $ 4,135 $ 5,460 $ 13,581 $ 17,306
Net investment income 160 157 496 473
Other revenue 38 57 120 171
-------------------------------- --------------------------------
Total revenues 4,333 5,674 14,197 17,950
Expenses:
Medical and other benefits 1,356 2,102 5,038 5,939
Selling, general and administrative 1,362 1,566 4,196 4,975
-------------------------------- --------------------------------
Total expenses 2,718 3,668 9,234 10,914
-------------------------------- --------------------------------
Income before income taxes $ 1,615 $ 2,006 $ 4,963 $ 7,036
================================ ================================
FINANCIAL STATISTICS
Loss ratio 32.8% 38.5% 37.1% 34.3%
Expense ratio 32.0% 27.6% 30.0% 27.8%
-------------------------------- --------------------------------
Combined ratio 64.8% 66.1% 67.1% 62.1%
================================ ================================
Membership at End of Period 196,035 259,000
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offerings are (1) health insurance for small employer groups
and (2) health insurance for individuals and families ("MedOne"). The Company
also offers life, dental, prescription drug, disability and accidental death
insurance, and provides stop-loss reinsurance and benefit administration for
self funded employer groups. The Company's products are actively marketed in 32
states and the District of Columbia through independent agents. The Company's
products generally provide discounts to insureds that utilize preferred provider
organizations ("PPOs"). AMSG owns a preferred provider network and also
contracts with other networks to ensure cost-effective health care choices to
its customers.
RESULTS OF OPERATIONS
The Company reported net income of $3.5 million or $0.25 per share for the
third quarter of 2001. This compares to a net loss of $1.4 million or $0.09 per
share for the third quarter of 2000. The improvement in profitability from the
third quarter of the prior year primarily reflects the results of management's
strategic plan including aggressive price increases, significant growth in the
Company's MedOne business and focused sales to target markets with the best
possible returns. Improving performance from the Company's small group health
business following several quarters of aggressive rate action necessary to
counter rising claim costs also contributed to the Company's profitability.
For the nine months ended September 30, 2001, the Company reported a net
loss of $170,000 or $0.01 per share, compared to net income of $2.5 million or
$0.17 per share for the same period in 2000. The nine month results for 2001
reflect an after-tax charge of $5.9 million or $0.41 per share taken in the
first quarter for legal related matters. See "Part II., Item 1. Legal
Proceedings" for a detailed discussion.
Excluding the effect of the legal accrual recorded in the first quarter,
the results for the third quarter of 2001 represent the fourth consecutive
quarter of improved earnings for the Company. The Company's health loss ratio
has declined for the fourth consecutive quarter and is at its lowest point in
more than two years. Management anticipates that the trend of health loss ratio
and earnings improvement will continue during the remainder of 2001. Management
now anticipates earnings to be approximately $0.65 per share for the full year
of 2001, excluding the first quarter legal accrual.
INSURANCE PREMIUMS AND MEMBERSHIP
Insurance premiums for the three months ended September 30, 2001 decreased
11.9% to $204.4 million from $232.0 million for the same period in 2000. For the
nine month period ended September 30, 2001, insurance premiums decreased to
$640.5 million from $720.4 million for the same period in the prior year. The
decrease primarily resulted from a decline in membership in select unprofitable
small group and exited markets, partially offset by rising premium rates on the
continuing block of business. Average fully insured medical premium per member
per month for the third quarter of 2001 increased by 15.4% to $158, compared to
the third quarter of 2000, reflecting significant rate actions taken by the
Company. As a result of the Company's actions to change its product mix,
redefine its markets, increase profitability, and reposition itself for the
future, quarterly insurance premiums are expected to shrink slightly before
leveling out in mid-year 2002.
12
Total medical and dental membership declined from 714,391 members at
September 30, 2000 to 580,316 members at September 30, 2001. The membership
decrease is primarily the result of the Company's success in terminating
business in several unprofitable markets, including exited markets, and lower
sales due to aggressive premium rate increases. The Company's MedOne product for
individuals and families continues to grow as a percentage of the Company's
overall business reflecting management's strategy to change the Company's mix of
business. MedOne membership now accounts for 43% of the Company's medical
membership in force. At the end of 1999 and 2000, MedOne membership accounted
for 23% and 34%, respectively. Management considers the MedOne product to be a
key strategic product and continues to take steps to accelerate membership and
premium growth in this market through an expanded agent force and additional
regional and national distribution agreements.
NET INVESTMENT INCOME
Net investment income for the three months ended September 30, 2001
decreased to $4.3 million from $4.6 million for the three months ended September
30, 2000. Net investment income was $13.2 million for the nine months ended
September 30, 2001 compared to $14.4 for the same period in 2000. The decrease
in net investment income is due primarily to a decrease in average invested
assets, offset partially by an increase in the average annual investment yield.
Average invested assets at cost were $264.0 million for the third quarter of
2001. In comparison, average invested assets were $291.6 million for the third
quarter of 2000. The average annual investment yield was 6.49% for the third
quarter of 2001 compared to 6.34% for the third quarter of 2000. Invested assets
have declined primarily as a result of the repurchase of Company stock.
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income from
claims processing and other administrative services, increased to $5.4 million
for the quarter compared to $5.3 million for the third quarter of 2000, and to
$16.1 million for the nine months ended September 30, 2001 from $15.2 million
for the same period in 2000. The increase from the prior year is primarily due
to an increase in fees charged for administrative services.
LOSS RATIO
The health loss ratio for the third quarter of 2001 was 71.3% compared to
78.8% for the third quarter of 2000. The health loss ratio for the nine months
ended September 30, 2001 was 73.8% compared to 77.4% for the nine months ended
September 30, 2000. The significant improvement was due to management's actions
and strategies to increase premiums and combat medical inflation. These actions
included premium rate increases, claims cost control initiatives and the exit
from unprofitable small group markets. The reduction also reflects increased
sales of MedOne products, which are priced for a lower loss ratio but have
higher selling and administrative costs. As anticipated, claim costs per member
per month have increased slightly, but were more than offset by increased
premiums per member per month.
The life segment loss ratio for the three months ended September 30, 2001
was 32.8% compared to 38.5% for the three months ended September 30, 2000. The
life segment loss ratio for the nine months ended September 30, 2001 was 37.1%
compared with 34.3% for the nine months ended September 30, 2000. The life
segment loss ratio tends to fluctuate from quarter to quarter as actual life
claims experience fluctuates. The life segment loss ratio for the nine month
period ended September 30, 2001 is consistent with historical averages and
anticipated average future results for this segment.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SG&A") expense ratio includes
commissions and selling expenses, administrative expenses, and premium taxes and
assessments. The SG&A expense ratio for health segment products for the three
months ended September 30, 2001 was 27.0%. This compares to 23.9% reported for
the three months ended September 30, 2000. Excluding the non-recurring legal
accrual recorded during the first quarter of 2001, the SG&A expense ratio for
health segment products for the nine months ended September 30, 2001 was 26.2%
compared with 24.0% for the same period in 2000. The increase largely reflects a
product mix change driven by growth in the MedOne business which has higher
selling and administrative costs but lower claim costs than the small group
product. Lower premium volume also contributed to the increase in the SG&A
ratio.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of insurance premiums,
administrative fee revenue and investment income. The primary uses of cash
include payment of medical and other benefits, SG&A expenses and debt service
costs. Positive cash flows are invested pending future payments of benefits and
other operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
The Company's cash provided by operations was $0.5 million for the nine
months ended September 30, 2001, including payment of the Skilstaf, Inc.
judgment in the third quarter. This compares to cash used in operations of $8.6
million for the nine months ended September 30, 2000. The improvement in cash
flow primarily reflects increased profitability of the Company. Management now
expects cash flow to be positive for the fourth quarter and full year of 2001.
The Company's investment portfolio consists primarily of investment grade
bonds and has limited exposure to equity securities. At September 30, 2001,
$262.5 million or 98.9% of the Company's investment portfolio was invested in
bonds. At December 31, 2000, $267.0 million or 99.0% of the Company's investment
portfolio was invested in bonds. The bond portfolio had an average quality
rating of Aa2 at September 30, 2001 and Aa3 at December 31, 2000, as measured by
Moody's Investor Service. The majority of the bond portfolio was classified as
available for sale. The Company has no investment in mortgage loans,
non-publicly traded securities (except for principal only strips of U.S.
Government securities), real estate held for investment or financial
derivatives.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict dividends to their
parent companies. Based upon the financial statements of the Company's insurance
subsidiaries as of December 31, 2000, as filed with the insurance regulators, no
dividends may be paid by these subsidiaries without prior regulatory approval.
The National Association of Insurance Commissioners has adopted risk-based
capital ("RBC") standards for health and life insurers designed to evaluate the
adequacy of statutory capital and surplus in relation to various business risks
faced by such insurers. The RBC formula is used by state insurance regulators as
an early warning tool to identify insurance companies that potentially are
inadequately capitalized. At December 31, 2000, the Company's principal
insurance company subsidiaries had RBC ratios that were substantially above the
levels which would require regulatory action.
During 2000, the Company's Board of Directors authorized an increase to the
Company's share repurchase program to a maximum allowable repurchase of $18.0
million. The Company purchased 75,100 shares of its outstanding common stock
during the third quarter of 2001 at a cost of $456,000. During October 2001, the
Company reached its maximum authorized purchase threshold, bringing the total
purchased under the program to 2.7 million shares at an aggregate purchase price
of $18.0 million.
14
At September 30, 2001, the Company maintained a revolving bank line of
credit agreement ("Credit Agreement") with a maximum commitment of $35.2 million
and a $10.0 million sublimit for swingline loans. At September 30, 2001, the
outstanding balance of advances under the Credit Agreement was $35.2 million.
The Credit Agreement contains customary covenants which, among other matters,
require the Company to achieve minimum financial results and restrict the
Company's ability to incur additional debt, pay future cash dividends and
dispose of assets outside the ordinary course of business. The Credit Agreement
was amended in April 2001 to revise the Company's applicable interest rate on
outstanding loans and the schedule of mandatory future commitment reductions
including a $4.8 million maximum commitment reduction from $40.0 million to
$35.2 million on April 27, 2001. Revised future annual principal amounts due for
all of the Company's debt, including debt under the Credit Agreement, as of
September 30, 2001 are $0.3 million for 2001, $6.2 million for 2002, $11.2
million for 2003, $12.5 million for 2004, and $10.2 million for 2005.
CAUTIONARY FACTORS
This report and other documents or oral presentations prepared or delivered
by and on behalf of the Company contain or may contain "forward-looking
statements" within the meaning of the safe harbor provisions of the United
States Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements based upon management's expectations at the time such
statements are made and are subject to risks and uncertainties that could cause
the Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "possible," "potential," "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause the Company's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
- Unexpected increases in health care costs resulting from the aging of the
population, advances in medical technology, increased utilization of
medical services and prescription drugs resulting from bioterrorism or
otherwise, health care inflation (particularly technology-driven procedures
and drug costs), possible epidemics and natural or man-made disasters and
other factors affecting the delivery and cost of health care that are
beyond the Company's control.
- The Company's ability to profitably distribute and sell its products,
including, changes in its business relationships with independent agents
who sell the Company's products, the Company's ability to retain key
producing sales agents, the Company's ability to expand its distribution
network, competitive factors such as the entrance of additional competitors
into the Company's markets, competitive pricing practices, the Company's
ability to generate new sales, sell new products and retain existing
customers, the Company's ability to predict future health care cost trends
and adequately price its products, and the Company's ability to control
expenses during a time of declining revenue and membership.
- Federal and state health care reform laws adopted in recent years,
currently proposed (such as the "Patients' Bill of Rights") or that may be
proposed in the future, which affect or may affect the Company's
operations, products, profitability or business prospects. Reform laws
adopted in recent years generally limit the ability of insurers and health
plans to use risk selection as a method of controlling costs for small
group business.
- Regulatory factors, including delays in regulatory approvals of rate
increases and policy forms; regulatory action resulting from market conduct
activity and general administrative compliance with state and federal laws;
restrictions on the ability of the Company's subsidiaries to transfer funds
to the Company or its other subsidiaries in the form of cash dividends,
loans or advances without prior approval or notification; the granting and
revoking of licenses to transact business; the amount and type of
investments that the Company may hold; minimum reserve and surplus
requirements; and risk-based capital requirements.
15
- Factors related to the Company's efforts to deal with adverse medical loss
ratio in its small group health business (which include implementing
significant rate increases, terminating business in unprofitable markets,
and introducing redesigned products), including the willingness of
employers and individuals to accept rate increases, premium repricing and
redesigned products.
- The development of and changes in claims reserves, particularly for highly
regulated markets and exited markets where insureds may be inclined to
increase utilization prior to termination of their policies.
- The effectiveness of the Company's strategy to expand sales of its MedOne
products for individuals and families, to focus its small group health
product sales in core markets and to grow its ancillary products, including
its life, dental and self-funded benefit administration business.
- The cost and other effects of legal and administrative proceedings,
including the expense of investigating, litigating and settling any claims
against the Company, and the general increase in litigation involving
managed care and medical insurers.
- Adverse outcomes of litigation against the Company.
- Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and transfer
assets.
- Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their A- (Excellent)
rating by A.M. Best.
- General economic conditions, including changes in employment, interest
rates and inflation that may impact the performance on the Company's
investment portfolio or decisions of individuals and employers to purchase
the Company's products.
- The Company's ability to maintain attractive preferred provider networks
for its insureds.
- The Company's ability to integrate effectively the operational, managerial
and financial aspects of future acquisitions.
- Factors affecting the Company's ability to hire and retain key executive,
managerial, professional and technical employees.
- Other business or investment considerations that may be disclosed from time
to time in the Company's Securities and Exchange Commission filings or in
other publicly disseminated written documents.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year ended
December 31, 2000.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 1999, a $6.9 million verdict was entered against American
Medical Security, Inc. ("AMS Inc."), the Company's third party administrator
("TPA") subsidiary, in the United States District Court for the Middle District
of Alabama. The decision was made in a lawsuit brought against AMS Inc. by
Skilstaf, Inc. ("Skilstaf"), an Alabama employee leasing company, in January
1998 alleging that AMS Inc. delayed claims payments under a contract with
Skilstaf. Skilstaf sought unspecified damages. The contract, which was entered
into in 1992 and terminated by Skilstaf in 1996, was a TPA contract for
Skilstaf's self funded employee benefit plan. AMS Inc. has argued that this case
is governed by the Employee Retirement Income Security Act of 1974, as amended,
which preempts all state law causes of action and limits damages to contract
damages. AMS Inc.'s post-trial motion to set aside the jury's finding was denied
by the court on March 20, 2000. As a result, AMS Inc. filed a notice of appeal
with the Eleventh Circuit Federal Appeals Court on April 17, 2000. On March 12,
2001, the Company received the Court of Appeal's decision, rendered on March 9,
2001, affirming the decision of the District Court. On March 30, 2001, AMS Inc.
filed a petition with the Court of Appeals for a rehearing by the full Court of
Appeals, which was denied on May 4, 2001. On August 1, 2001, the Company filed a
petition with the United States Supreme Court for a writ of certiorari to review
the decision of the Court of Appeals. In July 2001, at the direction of the
district court, the Company paid the full amount of the verdict plus interest.
In October 2001, the United States Supreme Court denied the Company's writ of
certiorari to review the Court of Appeals' decision. This case is now closed.
On February 7, 2000, a $5.4 million verdict was entered against AMS Inc.
and United Wisconsin Life Insurance Company ("UWLIC"), the Company's insurance
subsidiary, in the Common Pleas Court of Delaware County, Ohio, Civil Division,
in a lawsuit brought against AMS Inc. and UWLIC in 1996 by Health Administrators
of America, Inc. ("Health Administrators"), an insurance agency owned and
operated by a former agent of AMS Inc. The lawsuit alleges breach of written and
oral contracts involving commission amounts and fraud. The case was heard and
decided by a magistrate who awarded damages to Health Administrators, based on
breach of written commission and agent contracts and ruled in favor of AMS Inc.
and UWLIC on breach of oral contracts and fraud. On February 22, 2000, AMS Inc.
and UWLIC filed objections with the Common Pleas Court requesting that the
magistrate's decision against AMS Inc. and UWLIC be reversed. The Common Pleas
Court approved the magistrate's decision on April 10, 2000. As a result, AMS
Inc. and UWLIC filed a notice of appeal with the Court of Appeals, Delaware
County, Ohio, Fifth Appellate District on April 18, 2000. On March 29, 2001, the
Court of Appeals affirmed a portion of the verdict, with modifications,
representing approximately $3.0 million in damages, and reversed and remanded
the remaining issues in the case representing approximately $2.4 million in
damages. On May 2, 2001, the Company appealed the $3.0 million portion of the
damages to the Ohio Supreme Court, which, on July 25, 2001, declined to take the
appeal. Briefs have been submitted for the remanded portion of the case and the
parties are awaiting the trial court's decision. Management believes the Company
has adequately provided for losses that may result from this case.
The Company is involved in various other legal and regulatory matters
occurring in the normal course of its business. While the ultimate outcome of
the legal and regulatory matters cannot be determined at this time, in the
opinion of management, adequate provision has been made for losses which may
result from such matters; accordingly, the outcome of these matters is not
expected to have a material adverse effect on the consolidated financial
statements.
17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 9, 2001, the Company issued 25,000 restricted shares of the
Company's common stock ("Common Stock") to its Chief Executive Officer, Samuel
V. Miller, in a private placement transaction without registration under the
Securities Act of 1933, as amended, (the "Act") in reliance upon the exemption
from registration provided by Section 4(2) of that Act. Consideration received
by the Company for the shares consisted of the surrender for cancellation of
nonqualified stock options granted to the Chief Executive Officer in 1995 and
1996 to purchase a total of 433,857 shares of Common Stock. The 25,000 shares,
which were issued from the Company's treasury shares, are subject to forfeiture
restrictions for a period of up to five years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See the Exhibit Index following the Signature page of this report, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
A Form 8-K dated August 9, 2001, was filed by the Company to report the
adoption of a shareholder rights plan. A Form 8-K dated September 10, 2001, also
was submitted by the Company to furnish Item 9, Regulation FD Disclosure, a
financial presentation included on the Company's website.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: NOVEMBER 13, 2001
AMERICAN MEDICAL SECURITY GROUP, INC.
/S/ GARY D. GUENGERICH
Gary D. Guengerich
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Chief
Accounting Officer and duly authorized to
sign on behalf of the Registrant)
19
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended September 30, 2001
INCORPORATED HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
3 Articles of Amendment to Restated Articles Exhibit 3 of the Registrant's Form 10-Q
of Incorporation with Respect to for the quarter ended June 30, 2001.
Designation, Preferences, Limitations and
Relative Rights of Series B Junior
Cumulative Preferred Stock.
4 Rights Agreement, dated as of August 9, Exhibit 1 to the Registrant's
2001, between American Medical Security Registration Statement on Form 8-A filed
Group, Inc. and Firstar Bank, N.A., as August 14, 2001 and Exhibit 4 to the
Rights Agents, including the form of Right Registrant's Current Report on Form 8-K
Certificate as Exhibit B thereto. dated August 9, 2001, and filed on
August 14, 2001.
10 Restricted Stock Agreement with Chief X
Executive Officer dated July 9, 2001.
EX-1