Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTER REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
OR
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o |
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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: 001-14953
HEALTHMARKETS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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75-2044750 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
9151 Boulevard 26, North Richland Hills, Texas 76180
(Address of principal executive offices, zip code)
(817) 255-5200
(Registrants phone number, including area 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 1 months (or
for such shorter period that the registrant was required to submit and post such files). o
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
On April 21, 2011, the registrant had 28,397,133 outstanding shares of Class A-1 Common
Stock, $.01 Par Value, and 2,989,754 outstanding shares of Class A-2 Common Stock, $.01 Par Value.
HEALTHMARKETS, INC.
and Subsidiaries
First Quarter 2011 Form 10-Q
TABLE OF CONTENTS
1
HEALTHMARKETS, INC.
and Subsidiaries
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except per share data)
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March 31, |
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December 31, |
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2011 |
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2010 |
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(Unaudited) |
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ASSETS |
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Investments: |
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Securities available for sale
Fixed maturities, at fair value (cost: 2011 $563,980; 2010 $644,661) |
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$ |
591,990 |
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$ |
679,405 |
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Short-term and other investments |
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434,741 |
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373,023 |
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Total investments |
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1,026,731 |
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1,052,428 |
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Cash and cash equivalents |
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9,238 |
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12,874 |
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Student loan receivables |
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57,749 |
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60,312 |
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Restricted cash |
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10,779 |
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13,170 |
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Investment income due and accrued |
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9,083 |
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7,139 |
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Reinsurance recoverable ceded policy liabilities |
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358,804 |
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363,243 |
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Agent and other receivables |
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38,795 |
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32,508 |
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Deferred acquisition costs |
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25,293 |
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32,689 |
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Property and equipment, net of accumulated depreciation of $151,015 and $148,026 at
March 31, 2011 and December 31, 2010, respectively |
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42,296 |
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43,738 |
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Goodwill and other intangible assets |
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81,769 |
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82,331 |
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Recoverable federal income taxes |
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606 |
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3,443 |
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Other assets |
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22,813 |
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15,776 |
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$ |
1,683,956 |
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$ |
1,719,651 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Policy liabilities: |
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Future policy and contract benefits |
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$ |
484,339 |
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$ |
453,773 |
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Claims |
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123,989 |
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208,675 |
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Unearned premiums |
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33,574 |
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34,862 |
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Other policy liabilities |
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10,850 |
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7,687 |
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Accounts payable and accrued expenses |
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30,100 |
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38,131 |
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Other liabilities |
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45,189 |
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58,868 |
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Deferred federal income taxes |
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69,503 |
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58,883 |
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Debt |
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553,420 |
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553,420 |
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Student loan credit facility |
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65,950 |
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68,650 |
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Net liabilities of discontinued operations |
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1,430 |
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1,574 |
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1,418,344 |
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1,484,523 |
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Commitments and Contingencies (Note 11) |
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Stockholders equity: |
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Preferred stock, par value $0.01 per share authorized 10,000,000 shares, none issued |
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Common Stock, Class A-1, par value $0.01 per share authorized 90,000,000 shares,
28,454,231 issued and 28,397,176 outstanding at March 31, 2011; 28,281,859 issued and
28,256,028 outstanding at December 31, 2010. Class A-2, par value $0.01 per share
authorized 20,000,000 shares, 4,026,104 issued and 3,040,538 outstanding at March 31,
2011; 4,026,104 issued and 2,762,100 outstanding at December 31, 2010 |
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325 |
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323 |
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Additional paid-in capital |
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50,363 |
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54,772 |
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Accumulated other comprehensive income |
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18,810 |
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21,981 |
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Retained earnings |
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209,315 |
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178,313 |
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Treasury stock, at cost (57,056 Class A-1 common shares and 985,566 Class A-2 common
shares at March 31, 2011; 25,831 Class A-1 common shares and 1,264,004 Class A-2
common shares at December 31, 2010) |
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(13,201 |
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(20,261 |
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265,612 |
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235,128 |
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$ |
1,683,956 |
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$ |
1,719,651 |
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See Notes to Consolidated Condensed Financial Statements.
2
HEALTHMARKETS, INC.
and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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REVENUE |
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Health premiums |
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$ |
151,201 |
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$ |
205,773 |
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Life premiums and other considerations |
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466 |
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651 |
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151,667 |
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206,424 |
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Investment income |
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8,965 |
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11,271 |
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Commissions and other income |
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20,534 |
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13,649 |
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Total other-than-temporary impairment losses |
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Portion of loss recognized in other comprehensive
income (before taxes) |
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Net impairment losses recognized in earnings |
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Realized gains, net |
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3,858 |
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219 |
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185,024 |
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231,563 |
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BENEFITS AND EXPENSES |
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Benefits, claims, and settlement expenses |
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103,966 |
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121,796 |
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Underwriting, acquisition, and insurance expenses |
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30,231 |
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53,589 |
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Other expenses |
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38,535 |
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46,270 |
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Interest expense |
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7,111 |
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8,192 |
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179,843 |
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229,847 |
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Income from continuing operations before income taxes |
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5,181 |
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1,716 |
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Federal income tax expense |
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2,017 |
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948 |
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Income from continuing operations |
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3,164 |
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768 |
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Income from discontinued operations, (net of income
tax expense of $8 for the three months ended March
31, 2011, and $8 for the three months ended March
31, 2010, respectively) |
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14 |
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14 |
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Net income |
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$ |
3,178 |
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$ |
782 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.11 |
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$ |
0.03 |
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Income from discontinued operations |
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0.00 |
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0.00 |
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Net income per share, basic |
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$ |
0.11 |
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$ |
0.03 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.10 |
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$ |
0.03 |
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Income from discontinued operations |
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0.00 |
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0.00 |
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Net income per share, diluted |
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$ |
0.10 |
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$ |
0.03 |
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See Notes to Consolidated Condensed Financial Statements.
3
HEALTHMARKETS, INC.
and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Net income |
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$ |
3,178 |
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$ |
782 |
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Other comprehensive income (loss): |
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Unrealized gains (losses) on securities available for sale arising during the period |
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(2,260 |
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11,331 |
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Reclassification for investment (gains) losses included in net income |
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(3,858 |
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(219 |
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Other-than-temporary impairment losses recognized in OCI |
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Effect on other comprehensive income (loss) from investment securities |
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(6,118 |
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11,112 |
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Unrealized losses on derivatives used in cash flow hedging during the period |
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(4 |
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(487 |
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Reclassification adjustments included in net income |
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1,244 |
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2,504 |
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Effect on other comprehensive income from hedging activities |
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1,240 |
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2,017 |
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Other comprehensive income before tax |
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(4,878 |
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13,129 |
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Income tax expense (benefit) related to items of other comprehensive income |
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(1,707 |
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4,596 |
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Other comprehensive income (loss) net of tax |
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(3,171 |
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8,533 |
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Comprehensive income |
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$ |
7 |
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$ |
9,315 |
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See Notes to Consolidated Condensed Financial Statements.
4
HEALTHMARKETS, INC.
and Subsidiaries
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended |
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March 31, |
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2011 |
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2010 |
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Operating Activities: |
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Net income |
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$ |
3,178 |
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$ |
782 |
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Adjustments to reconcile net income to cash (used in) provided by
operating activities: |
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Income from discontinued operations |
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(14 |
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(14 |
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Realized gains, net |
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(3,858 |
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(219 |
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Change in deferred income taxes |
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(2,656 |
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224 |
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Depreciation and amortization |
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4,876 |
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5,862 |
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Amortization of prepaid monitoring fees |
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3,125 |
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3,750 |
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Equity based compensation expense |
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1,351 |
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1,440 |
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Other items, net |
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3,591 |
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4,446 |
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Changes in assets and liabilities: |
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Investment income due and accrued |
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(2,224 |
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(2,661 |
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Due premiums |
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3 |
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1,112 |
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Reinsurance recoverable ceded policy liabilities |
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4,439 |
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1,440 |
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Other receivables |
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(4,564 |
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606 |
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Deferred acquisition costs |
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7,396 |
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8,841 |
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Prepaid monitoring fees |
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(12,500 |
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(12,500 |
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Current income tax recoverable |
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2,837 |
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3,196 |
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Policy liabilities |
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(9,084 |
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(21,154 |
) |
Other liabilities and accrued expenses |
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(17,017 |
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(13,987 |
) |
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Cash used in continuing operations |
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(21,121 |
) |
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(18,836 |
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Cash used in discontinued operations |
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(130 |
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(116 |
) |
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Net cash used in operating activities |
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(21,251 |
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(18,952 |
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Investing Activities: |
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Student loan receivables |
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2,112 |
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2,193 |
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Securities available for sale |
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84,172 |
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|
29,611 |
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Short-term and other investments, net |
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(61,628 |
) |
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109,649 |
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Purchases of property and equipment |
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(1,547 |
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(3,627 |
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Change in restricted cash |
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2,391 |
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2,244 |
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Decrease (increase) in agent receivables |
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(2,614 |
) |
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|
459 |
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Cash provided by continuing operations |
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22,886 |
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|
140,529 |
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Cash provided by discontinued operations |
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Net cash provided by investing activities |
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22,886 |
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140,529 |
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Financing Activities: |
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Repayment of student loan credit facility |
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(2,700 |
) |
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(2,450 |
) |
Decrease in investment products |
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(354 |
) |
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(3,408 |
) |
Change in cash overdraft |
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(393 |
) |
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|
3,898 |
|
Proceeds from shares issued to agent plans and other |
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|
1,149 |
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|
1,521 |
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Purchases of treasury stock |
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(2,612 |
) |
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(1,764 |
) |
Dividends paid |
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(120,652 |
) |
Excess tax reduction from equity based compensation |
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(361 |
) |
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(339 |
) |
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Cash used in continuing operations |
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(5,271 |
) |
|
|
(123,194 |
) |
Cash used in discontinued operations |
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Net cash used in financing activities |
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(5,271 |
) |
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(123,194 |
) |
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Net change in cash and cash equivalents |
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(3,636 |
) |
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(1,617 |
) |
Cash and cash equivalents at beginning of period |
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|
12,874 |
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17,406 |
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Cash and cash equivalents at end of period in continuing operations |
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$ |
9,238 |
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$ |
15,789 |
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Supplemental disclosures: |
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Income taxes paid |
|
$ |
2,207 |
|
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$ |
|
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Interest paid |
|
$ |
5,342 |
|
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$ |
5,338 |
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|
See Notes to Consolidated Condensed Financial Statements.
5
HEALTHMARKETS, INC.
and Subsidiaries
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements for HealthMarkets, Inc. (the
Company or HealthMarkets) and its subsidiaries have been prepared in accordance with United
States generally accepted accounting principles (GAAP) for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, such financial statements
do not include all of the information and notes required by GAAP for complete financial statements.
In the opinion of management, these financial statements include all adjustments, consisting of
normal recurring adjustments and accruals, necessary for the fair presentation of the consolidated
condensed balance sheets, statements of income, statements of comprehensive income and statements
of cash flows for the periods presented. The accompanying December 31, 2010 consolidated condensed
balance sheet was derived from audited consolidated financial statements, but does not include all
disclosures required by GAAP for annual financial statement purposes. Preparing financial
statements requires management to make estimates and assumptions that affect the amounts that are
reported in the financial statements and the accompanying disclosures. Although these estimates are
based on managements knowledge of current events and actions that HealthMarkets may undertake in
the future, actual results may differ materially from the estimates. Operating results for the
three months ended March 31, 2011 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2011. We have evaluated subsequent events for
recognition or disclosure through the date we filed this Form 10-Q with the Securities and Exchange
Commission (the SEC). For further information, refer to the consolidated financial statements
and notes thereto, included in the Companys Annual Report on Form 10-K for the year ended December
31, 2010.
HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in
its wholly owned subsidiary, HealthMarkets, LLC. HealthMarkets, LLCs principal assets are its
investments in its separate operating subsidiaries, including its regulated insurance subsidiaries.
HealthMarkets conducts its insurance underwriting businesses through its indirect wholly owned
insurance company subsidiaries, The MEGA Life and Health Insurance Company (MEGA), Mid-West
National Life Insurance Company of Tennessee (Mid-West) and The Chesapeake Life Insurance Company
(Chesapeake), and conducts its insurance distribution business through its indirect insurance
agency subsidiary, Insphere Insurance Solutions, Inc. (Insphere).
Reclassification
Certain amounts in the 2010 financial statements have been reclassified to conform to the 2011
financial statement presentation.
2. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2011, the Company changed the method used to calculate its policy
liabilities for the majority of its health insurance products because it believes that the new
method will be preferable in light of, among other factors, certain changes required by Health Care
Reform Legislation.
For the majority of health insurance products in the Commercial Health Division, the Companys
claims liabilities are estimated using the developmental method. The Company establishes the claims
liabilities based upon claim incurral dates, supplemented with certain refinements as appropriate.
Prior to January 1, 2011, for products introduced prior to 2008, the Company used a technique for
calculating claims liabilities referred to as the Modified Incurred Date (MID) technique. Under
the MID technique, claims liabilities for the cost of all medical services related to a distinct
accident or sickness are based on the earliest date of diagnosis or treatment, even though the
medical services associated with such accident or sickness might not be rendered to the insured
until a later financial reporting period. Claims liabilities based on the earliest date of
diagnosis generally result in larger initial claims liabilities which complete over a longer period
of time than claims estimation techniques using dates of service. Under the MID technique, the
Company modifies the original incurred date coding by establishing a new incurral date if: (i)
there is a break of more than six months in the occurrence of a covered benefit service or (ii) if
claims payments continue for more than thirty-six months without a six month break in service.
6
For products introduced in 2008 and later, claims payments are considered incurred on the date
the service is rendered, regardless of whether the sickness or accident is distinct or the same.
This is referred to as the Service Date
(SD) technique. This is consistent with the assumptions used in the pricing of these
products and the policy language. At December 31, 2010, the Company had claims liabilities for
products using the SD technique in the amount of $10.6 million, representing approximately 8% of
the total claims liabilities of the Commercial Health Division. The use of the SD technique in
establishing claims liabilities requires the establishment of a future policy benefit reserve while
the MID technique does not. For the reasons discussed below, we believe that it is preferable to
estimate the Companys claims liabilities using the SD technique, and to apply such technique for
claims liabilities previously calculated based on the MID technique.
As previously disclosed, in March 2010, Health Care Reform Legislation was signed into law.
The Health Care Reform Legislation requires, beginning in 2011, a mandated minimum loss ratio
(MLR) of 80% for the individual and small group markets. If MLR is below the mandated minimum,
the Health Care Reform Legislation generally requires that the insurer return the amount of premium
that is in excess of the required MLR to the policyholder in the form of rebates. The MLR is
calculated for each of our insurance subsidiaries on a state-by-state basis in each state where the
Company has issued major medical business. The Interim Final Rule from the Department of Health and
Human Services (HHS) indicates that the MLR calculation shall utilize data on incurred claims for
the calendar year, paid through March of the following year.
Any refund of premiums in excess of the required MLR will be based on the completion of claims
three months after the calendar year end. Based on the MLR calculation requiring only three
additional months of claims and the SD technique being the most prevalent method of estimating
claims liabilities in the health insurance industry, the Company believes that the SD technique is
the preferable method for calculating the MLR. The Company also believes that using the SD method
for the settlement of the MLR calculation will reduce uncertainty regarding the ultimate amount of
incurred claims, as the MID technique estimates claims over a longer settlement period. The
calculation of the MLR using the Companys current data results in claims for a given incurred year
that are approximately 95% complete three months after the valuation date using the SD technique,
whereas claims are approximately 82% complete 3 months after the valuation date using the MID
technique. Additionally, the use of the MID technique for financial reporting purposes, with the
settlement of the MLR calculated on a SD basis, may result in an over accrual of the claims
liabilities on the financial statements as a result of the Companys accrual for rebates in the MLR
calculation.
In light of the changes resulting from the Health Care Reform Legislation, and given that the
Companys insurance contracts would support the use of either reserving technique, the Company,
after discussions with its domiciliary insurance regulators on the preferred methodology for
calculating rebates under the MLR requirements of the Health Care Reform Legislation, determined
that the SD method is preferable in determining the estimation of its claims liabilities. For the
in-force policies utilizing the MID technique for estimation of claims liabilities, effective
January 1, 2011, the Company changed the method used to calculate its claims liabilities from the
MID technique to the SD technique. Consistent with the Companys products introduced in 2008 and
later, the Company established a reserve for future policy benefits for products introduced prior
to 2008.
The Company has determined it is impracticable to determine the period-specific effects of the
change in reserving methodology from MID to SD on all prior periods since retrospective application
requires significant estimates of amounts and it is impossible to distinguish objectively
information about those estimates at previous reporting dates. Based on the guidance of ASC
250-10-45 Accounting Changes Change in Accounting Principle if the cumulative effect of applying
a change in accounting principle to all prior periods is determinable, but it is impracticable to
determine the period-specific effects of that change to all prior periods presented, the cumulative
effect of the change to the new accounting principle shall be applied to the carrying amounts of
assets and liabilities as of beginning of the earliest period to which the new accounting principle
can be applied. As such the Company accounted for the change effective January 1, 2011 by
recording the cumulative effect of the change in accounting at that date.
Effective January 1, 2011, as a result of this change, the Company recorded the following; (i)
a decrease in the amount of $77.9 million to claims and claims administration liabilities, (ii) an
increase in the amount of $35.1 million to future policy and contract benefits, (iii) an increase
in the amount of $15.0 million to deferred federal income tax liability and (iv) an increase in the
amount of $27.8 million to retained earnings.
7
3. CONCENTRATIONS
Insphere maintains marketing agreements for the distribution of health benefits plans with a
number of non-affiliated insurance carriers as well as the Companys own insurance subsidiaries.
The non-affiliated carriers include, among others, United Healthcares Golden Rule Insurance
Company, Humana and Aetna, for which Insphere distributes individual health insurance products. The
products offered by these third-party carriers and the Companys insurance subsidiaries offer
coverage and benefit variations that may fit one consumer better than another. In the markets
where Insphere has commenced distribution of these third-party carrier products, these products
have, to a great extent, replaced the sale of the Companys own health benefit plans. During the
three months ended March 31, 2011, approximately 81% of the Companys health benefit plan sales
marketed by Insphere were underwritten by these three third-party carriers.
Additionally, during the three months ended March 31, 2011, the Companys insurance
subsidiaries generated approximately 56% of its premium revenue from new and existing business from
the following 10 states:
|
|
|
|
|
|
|
Percentage |
|
California |
|
|
14 |
% |
Texas |
|
|
7 |
% |
Maine |
|
|
6 |
% |
Florida |
|
|
6 |
% |
Massachusetts |
|
|
5 |
% |
Washington |
|
|
5 |
% |
Illinois |
|
|
5 |
% |
North Carolina |
|
|
3 |
% |
Pennsylvania |
|
|
3 |
% |
Georgia |
|
|
2 |
% |
|
|
|
|
|
|
|
56 |
% |
4. RECENT ACCOUNTING PRONOUNCEMENTS
In October 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update 2010-26, Financial Services Insurance (ASC Topic 944): Accounting for Costs Associated
with Acquiring or Renewing Insurance Contracts (ASU 2010-26), which clarifies what costs relating
to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that should
be capitalized include (1) incremental direct costs of successful contract acquisition and (2)
certain costs related directly to successful acquisition activities (underwriting, policy issuance
and processing, medical and inspection, and sales force contract selling) performed by the insurer
for the contract. Advertising costs should be included in deferred acquisition costs only if the
capitalization criteria in the US GAAP direct-response advertising guidance are met. All other
acquisition-related costs should be charged to expense as incurred.
The provisions of ASU 2010-26 are effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2011, and should be applied prospectively. Retrospective
application is permitted, and early adoption is permitted at the beginning of an entitys annual
reporting period. The Company is currently in the process of determining the impact of adoption of
the provisions of ASU 2010-26.
During the first quarter of 2010, the Company adopted ASC Update 2010-06, Fair Value
Measurements and Disclosures: Improving Disclosures about Fair Value Measurements (ASU 2010-06).
ASU 2010-06 amends ASC Subtopic 820-10 to require new disclosures around the transfers in and out
of Level 1 and Level 2 and around activity in Level 3 fair value measurements. Such guidance also
provides amendments to ASC 820 which clarifies existing disclosures on the level of disaggregation,
inputs and valuation techniques. Certain disclosures about purchases, sales, issuances, and
settlements relating to Level 3 measurements are effective for fiscal years beginning after
December 15, 2010. The Company implemented these additional disclosure items in the first quarter
of 2011.
5. FAIR VALUE MEASUREMENTS
In accordance with ASC 820, the Company categorizes its investments and certain other assets
and liabilities recorded at fair value into a three-level fair value hierarchy as follows:
|
|
|
Level 1 Unadjusted quoted market prices for identical assets or liabilities in active
markets which are accessible by the Company. |
|
|
|
Level 2 Observable prices in active markets for similar assets or liabilities.
Prices for identical or similar assets or liabilities in markets which are not active.
Directly observable market inputs for substantially the full term of the asset or
liability, such as interest rates and yield curves at commonly quoted intervals,
volatilities, prepayment speeds, default rates, and credit spreads. Market inputs that are
not directly observable but are derived from or corroborated by observable market data. |
|
|
|
Level 3 Unobservable inputs based on the Companys own judgment as to assumptions a
market participant would use, including inputs derived from extrapolation and interpolation
that are not corroborated by observable market data. |
8
The Company evaluates the various types of securities in its investment portfolio to determine
the appropriate level in the fair value hierarchy based upon trading activity and the observability
of market inputs. The Company employs control processes to validate the reasonableness of the fair
value estimates of its assets and liabilities, including those estimates based on prices and quotes
obtained from independent third party sources. The Companys procedures generally include, but are
not limited to, initial and ongoing evaluation of methodologies used by independent third parties
and monthly analytical reviews of the prices against current pricing trends and statistics.
Where possible, the Company utilizes quoted market prices to measure fair value. For
investments that have quoted market prices in active markets, the Company uses the quoted market
price as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy.
When quoted market prices in active markets are unavailable, the Company determines fair values
using various valuation techniques and models based on a range of observable market inputs
including pricing models, quoted market price of publicly traded securities with similar duration
and yield, time value, yield curve, prepayment speeds, default rates and discounted cash flow. In
most cases, these estimates are determined based on independent third party valuation information,
and the amounts are disclosed in Level 2 of the fair value hierarchy. Generally, the Company
obtains a single price or quote per instrument from independent third parties to assist in
establishing the fair value of these investments.
If quoted market prices and independent third party valuation information are unavailable, the
Company produces an estimate of fair value based on internally developed valuation techniques,
which, depending on the level of observable market inputs, will render the fair value estimate as
Level 2 or Level 3. On occasions when pricing service data is unavailable, the Company may rely on
bid/ask spreads from dealers in determining the fair value. When dealer quotations are used to
assist in establishing the fair value, the Company generally obtains one quote per instrument. The
quotes obtained from dealers or brokers are generally non-binding. When dealer quotations are used,
the Company uses the mid-mark as fair value. When broker or dealer quotations are used for
valuation or price verification, greater priority is given to executable quotes. As part of the
price verification process, valuations based on quotes are corroborated by comparison both to other
quotes and to recent trading activity in the same or similar instruments.
To the extent the Company determines that a price or quote is inconsistent with actual trading
activity observed in that investment or similar investments, or if the Company does not think the
quote is reflective of the market value for the investment, the Company will internally develop a
fair value using this observable market information and disclose the occurrence of this
circumstance.
In accordance with ASC 820, the Company has categorized its available for sale securities into
a three level fair value hierarchy based on the priority of inputs to the valuation techniques. The
fair values of investments disclosed in Level 1 of the fair value hierarchy include money market
funds and certain U.S. government securities, while the investments disclosed in Level 2 include
the majority of the Companys fixed income investments. In cases where there is limited activity or
less transparency around inputs to the valuation, the Company classifies the fair value estimates
within Level 3 of the fair value hierarchy.
As of March 31, 2011, all of the Companys investments classified within Level 2 and Level 3
of the fair value hierarchy are valued based on quotes or prices obtained from independent third
parties, except for $193.0 million of Corporate debt and other classified as Level 2, and
$810,000 of Commercial-backed investments classified as Level 3. The Corporate debt and other
investments classified as Level 2 noted above includes $99.7 million of an investment grade
corporate bond issued by UnitedHealth Group Inc. that was received as consideration for the sale of
the Companys former Student Insurance Division in December 2006 and $85.6 million of an investment
grade corporate bond received from a unit of the CIGNA Corporation as consideration for the receipt
of the former Star HRG assets.
9
Fair Value Hierarchy on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are categorized in the
tables below based upon the lowest level of significant input to the valuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value at March 31, 2011 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
U.S. and U.S. Government agencies |
|
$ |
4,583 |
|
|
$ |
51,403 |
|
|
$ |
|
|
|
$ |
55,986 |
|
Corporate bonds and municipals |
|
|
|
|
|
|
342,133 |
|
|
|
|
|
|
|
342,133 |
|
Residential-backed issued by agencies |
|
|
|
|
|
|
66,015 |
|
|
|
|
|
|
|
66,015 |
|
Commercial-backed issued by agencies |
|
|
|
|
|
|
3,155 |
|
|
|
|
|
|
|
3,155 |
|
Residential-backed |
|
|
|
|
|
|
2,115 |
|
|
|
|
|
|
|
2,115 |
|
Commercial-backed |
|
|
|
|
|
|
28,853 |
|
|
|
810 |
|
|
|
29,663 |
|
Asset-backed |
|
|
|
|
|
|
7,315 |
|
|
|
|
|
|
|
7,315 |
|
Other bonds |
|
|
|
|
|
|
85,608 |
|
|
|
|
|
|
|
85,608 |
|
Other invested assets (1) |
|
|
|
|
|
|
|
|
|
|
2,613 |
|
|
|
2,613 |
|
Short-term investments (2) |
|
|
409,485 |
|
|
|
|
|
|
|
|
|
|
|
409,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
414,068 |
|
|
$ |
586,597 |
|
|
$ |
3,423 |
|
|
$ |
1,004,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments in entities that calculate net asset value per share |
|
(2) |
|
Amount excludes $22.6 million of short-term other investments which are not
subject to fair value measurement. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value at March 31, 2011 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Interest rate swaps |
|
$ |
|
|
|
$ |
1,177 |
|
|
$ |
|
|
|
$ |
1,177 |
|
Agent and employee plans |
|
|
|
|
|
|
|
|
|
|
3,538 |
|
|
|
3,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
1,177 |
|
|
$ |
3,538 |
|
|
$ |
4,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets at Fair Value at December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
U.S. and U.S. Government agencies |
|
$ |
4,611 |
|
|
$ |
51,655 |
|
|
$ |
|
|
|
$ |
56,266 |
|
Corporate bonds and municipals |
|
|
|
|
|
|
402,883 |
|
|
|
|
|
|
|
402,883 |
|
Residential-backed issued by agencies |
|
|
|
|
|
|
72,684 |
|
|
|
|
|
|
|
72,684 |
|
Commercial-backed issued by agencies |
|
|
|
|
|
|
5,392 |
|
|
|
|
|
|
|
5,392 |
|
Residential-backed |
|
|
|
|
|
|
2,410 |
|
|
|
|
|
|
|
2,410 |
|
Commercial-backed |
|
|
|
|
|
|
44,367 |
|
|
|
916 |
|
|
|
45,283 |
|
Asset-backed |
|
|
|
|
|
|
8,095 |
|
|
|
|
|
|
|
8,095 |
|
Other bonds |
|
|
|
|
|
|
86,392 |
|
|
|
|
|
|
|
86,392 |
|
Other invested assets (1) |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
|
|
2,000 |
|
Short-term investments (2) |
|
|
347,121 |
|
|
|
|
|
|
|
|
|
|
|
347,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
351,732 |
|
|
$ |
673,878 |
|
|
$ |
2,916 |
|
|
$ |
1,028,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments in entities that calculate net asset value per share |
|
(2) |
|
Amount excludes $23.9 million of short-term other investments which are not
subject to fair value measurement. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at Fair Value at December 31, 2010 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
(In thousands) |
|
Interest rate swaps |
|
$ |
|
|
|
$ |
2,367 |
|
|
$ |
|
|
|
$ |
2,367 |
|
Agent and employee plans |
|
|
|
|
|
|
|
|
|
|
6,238 |
|
|
|
6,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
2,367 |
|
|
$ |
6,238 |
|
|
$ |
8,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the valuation methodologies used for certain assets and
liabilities of the Company measured at fair value on a recurring basis, including the general
classification of such assets pursuant to the valuation hierarchy.
Fixed Income Investments
Available for sale investments
The Companys fixed income investments include investments in U.S. Treasury securities, U.S.
Government agency bonds, corporate bonds, mortgage-backed and asset-backed securities, and
municipal securities and bonds.
10
The Company estimates the fair value of its U.S. Treasury securities using unadjusted quoted
market prices, and accordingly, discloses these investments in Level 1 of the fair value hierarchy.
The fair values of the majority of non-U.S. treasury securities held by the Company are determined
based on observable market inputs provided by independent third party valuation information. The
market inputs utilized in the pricing evaluation include but are not limited to, benchmark yields,
reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities,
bids, offers, reference data, and industry and economic events. The Company classifies the fair
value estimates based on these observable market inputs within Level 2 of the fair value hierarchy.
Investments classified within Level 2 consist of U.S. government agencies bonds, corporate bonds,
mortgage-backed and asset-backed securities, and municipal bonds.
The Company also holds a fixed income commercial asset-backed investment for which it
estimates the fair value using an internal pricing matrix with some unobservable inputs that are
significant to the valuation. Consequently, the lack of transparency in the inputs and availability
of independent third party pricing information for this investment resulted in its fair value being
classified within the Level 3 of the hierarchy. As of March 31, 2011, the fair value of such
commercial asset-backed security which represents approximately 0.1% of the Companys total fixed
income investments is reflected within the Level 3 of the fair value hierarchy.
Other invested assets
The Companys other invested assets consist of one alternative investment that owns a
portfolio of collateralized debt obligation equity investments managed by a third party management
group. The Company calculates the fair market value of such investment using the net asset value
per share, which is determined based on unobservable inputs. Accordingly, the fair value of this
asset is reflected within Level 3 of the fair value hierarchy.
The Company has committed to fund $5.0 million to such equity investment, of which the entire
amount has been funded to date. There are no redemption opportunities, and the fund will terminate
when the underlying collateralized debt obligation deals mature.
Short-term investments
The Companys short-term investments primarily consist of highly liquid money market funds,
which are reflected within Level 1 of the fair value hierarchy.
Derivatives
The Companys derivative instruments are valued utilizing valuation models that primarily use
market observable inputs and are traded in the markets where quoted market prices are not readily
available, and accordingly, these instruments are reflected within the Level 2 of the fair value
hierarchy.
Agent and Employee Stock Plans
The Company accounts for its agent and certain employee stock plan liabilities based on the
Companys share price at the end of each reporting period. The Companys share price at the end of
each reporting period is based on the prevailing fair value as determined by the Companys Board of
Directors (see Note 12 of Notes to Consolidated Condensed Financial Statements). The Company
largely uses unobservable inputs in deriving the fair value of its share price and the value is,
therefore, reflected in Level 3 of the hierarchy.
11
Changes in Level 3 Assets and Liabilities
The tables below summarize the change in balance sheet carrying values associated with Level 3
financial instruments and agent and employee stock plans for the three months ended March 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Level 3 Assets and Liabilities Measured at Fair Value |
|
|
|
|
|
|
|
For the Year Ended March 31, 2011 |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Realized |
|
|
Transfer |
|
|
|
|
|
|
Beginning |
|
|
Gains or |
|
|
Sales or |
|
|
|
|
|
|
Gains or |
|
|
in/(out) of |
|
|
Ending |
|
|
|
Balance |
|
|
(Losses) |
|
|
Redemption |
|
|
Settlements |
|
|
(Losses)(1) |
|
|
Level 3, Net |
|
|
Balance |
|
|
|
(In thousands) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial-backed |
|
$ |
916 |
|
|
$ |
(11 |
) |
|
$ |
(99 |
) |
|
$ |
4 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
810 |
|
Other invested assets |
|
|
2,000 |
|
|
|
618 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
2,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,916 |
|
|
$ |
607 |
|
|
$ |
(99 |
) |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agent and employee stock plans |
|
$ |
6,238 |
|
|
$ |
144 |
|
|
$ |
|
|
|
$ |
(2,844 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized losses for the period are included in Realized gains, net on the Companys
consolidated condensed statement of income (loss). |
During the three months ended March 31, 2011, the Company did not transfer securities
between Level 1, Level 2 and Level 3.
Investments not reported at fair value
Other investments consists of investments in equity investees, which are accounted for under
the equity method of accounting on the Companys consolidated condensed balance sheet at cost.
6. INVESTMENTS
The Companys investments consist of the following at March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Securities available for sale |
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
591,990 |
|
|
$ |
679,405 |
|
Short-term and other investments |
|
|
434,741 |
|
|
|
373,023 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
1,026,731 |
|
|
$ |
1,052,428 |
|
|
|
|
|
|
|
|
Available for sale fixed maturities are reported at fair value which was derived as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Non-credit Loss |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Recognized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
in OCI |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. and U.S. Government agencies |
|
$ |
55,288 |
|
|
$ |
765 |
|
|
$ |
(67 |
) |
|
$ |
|
|
|
$ |
55,986 |
|
Residential-backed issued by agencies |
|
|
62,622 |
|
|
|
3,461 |
|
|
|
(68 |
) |
|
|
|
|
|
|
66,015 |
|
Commercial-backed issued by agencies |
|
|
3,056 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
3,155 |
|
Residential-backed |
|
|
2,061 |
|
|
|
54 |
|
|
|
|
|
|
|
|
|
|
|
2,115 |
|
Commercial-backed |
|
|
28,706 |
|
|
|
957 |
|
|
|
|
|
|
|
|
|
|
|
29,663 |
|
Asset-backed |
|
|
7,301 |
|
|
|
315 |
|
|
|
(20 |
) |
|
|
(281 |
) |
|
|
7,315 |
|
Corporate bonds and municipals |
|
|
326,550 |
|
|
|
16,161 |
|
|
|
(578 |
) |
|
|
|
|
|
|
342,133 |
|
Other bonds |
|
|
78,396 |
|
|
|
7,212 |
|
|
|
|
|
|
|
|
|
|
|
85,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
563,980 |
|
|
$ |
29,024 |
|
|
$ |
(733 |
) |
|
$ |
(281 |
) |
|
$ |
591,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
Non-credit Loss |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Recognized |
|
|
|
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
in OCI |
|
|
Fair Value |
|
|
|
(In thousands) |
|
U.S. and U.S. Government agencies |
|
$ |
55,338 |
|
|
$ |
1,006 |
|
|
$ |
(78 |
) |
|
$ |
|
|
|
$ |
56,266 |
|
Residential-backed issued by agencies |
|
|
68,932 |
|
|
|
3,827 |
|
|
|
(75 |
) |
|
|
|
|
|
|
72,684 |
|
Commercial-backed issued by agencies |
|
|
5,156 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
5,392 |
|
Residential-backed |
|
|
2,344 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
2,410 |
|
Commercial-backed |
|
|
43,261 |
|
|
|
2,022 |
|
|
|
|
|
|
|
|
|
|
|
45,283 |
|
Asset-backed |
|
|
8,046 |
|
|
|
346 |
|
|
|
(16 |
) |
|
|
(281 |
) |
|
|
8,095 |
|
Corporate bonds and municipals |
|
|
383,188 |
|
|
|
21,133 |
|
|
|
(1,438 |
) |
|
|
|
|
|
|
402,883 |
|
Other bonds |
|
|
78,396 |
|
|
|
7,996 |
|
|
|
|
|
|
|
|
|
|
|
86,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
644,661 |
|
|
$ |
36,632 |
|
|
$ |
(1,607 |
) |
|
$ |
(281 |
) |
|
$ |
679,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and fair value of available for sale fixed maturities at March 31,
2011, by contractual maturity, are set forth in the table below. Fixed maturities subject to early
or unscheduled prepayments have been included based upon their contractual maturity dates. Actual
maturities will differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Amortized |
|
|
|
|
|
|
Cost |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Maturity: |
|
|
|
|
|
|
|
|
One year or less |
|
$ |
52,050 |
|
|
$ |
52,673 |
|
Over 1 year through 5 years |
|
|
115,985 |
|
|
|
121,308 |
|
Over 5 years through 10 years |
|
|
183,042 |
|
|
|
192,292 |
|
Over 10 years |
|
|
109,157 |
|
|
|
117,454 |
|
|
|
|
|
|
|
|
|
|
|
460,234 |
|
|
|
483,727 |
|
Mortgage-backed and asset-backed securities |
|
|
103,746 |
|
|
|
108,263 |
|
|
|
|
|
|
|
|
Total fixed maturities |
|
$ |
563,980 |
|
|
$ |
591,990 |
|
|
|
|
|
|
|
|
See Note 5 of Notes to Consolidated Condensed Financial Statements for additional
disclosures on fair value measurements.
A summary of net investment income by source is set forth below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Fixed maturities |
|
$ |
7,270 |
|
|
$ |
9,497 |
|
Equity securities |
|
|
|
|
|
|
10 |
|
Short-term and other investments |
|
|
1,265 |
|
|
|
651 |
|
Agent receivables |
|
|
91 |
|
|
|
449 |
|
Student loan interest income |
|
|
841 |
|
|
|
1,070 |
|
|
|
|
|
|
|
|
|
|
|
9,467 |
|
|
|
11,677 |
|
Less investment expenses |
|
|
502 |
|
|
|
406 |
|
|
|
|
|
|
|
|
|
|
$ |
8,965 |
|
|
$ |
11,271 |
|
|
|
|
|
|
|
|
Realized Gains and Losses
Realized gains and losses on sales of investments are recognized in net income on the specific
identification basis and include write downs on those investments deemed to have other than
temporary declines in fair values. Gains and losses on trading securities are reported in Realized
gains, net on the consolidated condensed statements of income.
Fixed maturities
Proceeds from the sale and call of investments in fixed maturities were $61.6 million and
$16.7 million for the three months ended March 31, 2011 and 2010, respectively. Proceeds from
maturities, sinking and principal reductions amounted to $22.6 million and $21.5 million for the
three months ended March 31, 2011 and 2010, respectively. During 2011 and 2010, the Company
realized gross gains of $3.9 million and $235,000, respectively, on the sale and call of fixed
maturity investments. The company realized no gross losses in 2011 and realized gross losses of
$16,000 during 2010.
13
Other than temporary impairment (OTTI)
During the three months ended March 31, 2011, the Company recognized no OTTI losses.
Set forth below is a summary of cumulative OTTI losses on debt securities held by the Company
at March 31, 2011, a portion of which have been recognized in Net impairment losses recognized in
earnings on the consolidated condensed statement of income and a portion of which have been
recognized in Accumulated other comprehensive income on the consolidated condensed balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reductions for |
|
|
|
|
|
|
|
|
|
|
|
Additions for OTTI |
|
|
|
|
|
|
increases in cash |
|
|
|
|
Cumulative OTTI |
|
Additions to OTTI |
|
|
securities where |
|
|
|
|
|
|
flows expected to |
|
|
Cumulative OTTI |
|
credit losses |
|
securities where no |
|
|
credit losses have |
|
|
Reductions for |
|
|
be collected that |
|
|
credit losses |
|
recognized for |
|
credit losses were |
|
|
been recognized |
|
|
securities sold |
|
|
are recognized |
|
|
recognized for |
|
securities still held at |
|
recognized prior to |
|
|
prior to |
|
|
during the period |
|
|
over the remaining |
|
|
securities still held at |
|
January 1, 2011 |
|
January 1, 2011 |
|
|
January 1, 2011 |
|
|
(Realized) |
|
|
life of the security |
|
|
March 31, 2011 |
|
|
|
|
(In thousands) |
|
$ |
4,104 |
|
$ |
|
|
|
$ |
|
|
|
$ |
(586 |
) |
|
$ |
|
|
|
$ |
3,518 |
|
Unrealized Gains and Losses
Fixed maturities
Set forth below is a summary of gross unrealized losses in its fixed maturities as of March
31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Unrealized Loss |
|
|
Unrealized Loss |
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
(In thousands) |
|
U.S. and U.S. Government agencies |
|
$ |
|
|
|
$ |
|
|
|
$ |
16,266 |
|
|
$ |
67 |
|
|
$ |
16,266 |
|
|
$ |
67 |
|
Residential-backed issued by agencies |
|
|
|
|
|
|
|
|
|
|
4,596 |
|
|
|
68 |
|
|
|
4,596 |
|
|
|
68 |
|
Commercial-backed issued by agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed |
|
|
317 |
|
|
|
10 |
|
|
|
2,880 |
|
|
|
10 |
|
|
|
3,197 |
|
|
|
20 |
|
Corporate bonds and municipals |
|
|
|
|
|
|
|
|
|
|
24,680 |
|
|
|
578 |
|
|
|
24,680 |
|
|
|
578 |
|
Other bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
317 |
|
|
$ |
10 |
|
|
$ |
48,422 |
|
|
$ |
723 |
|
|
$ |
48,739 |
|
|
$ |
733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Unrealized Loss |
|
|
Unrealized Loss |
|
|
|
|
|
|
Less Than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
Description of Securities |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
U.S. and U.S. Government agencies |
|
$ |
16,254 |
|
|
$ |
78 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,254 |
|
|
$ |
78 |
|
Residential-backed issued by agencies |
|
|
4,810 |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
4,810 |
|
|
|
75 |
|
Commercial-backed issued by agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential-backed |
|
|
|
|
|
|
|
|
|
|
426 |
|
|
|
|
|
|
|
426 |
|
|
|
|
|
Commercial-backed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed |
|
|
|
|
|
|
|
|
|
|
3,296 |
|
|
|
16 |
|
|
|
3,296 |
|
|
|
16 |
|
Corporate bonds and municipals |
|
|
7,124 |
|
|
|
57 |
|
|
|
30,967 |
|
|
|
1,381 |
|
|
|
38,091 |
|
|
|
1,438 |
|
Other bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
28,188 |
|
|
$ |
210 |
|
|
$ |
34,689 |
|
|
$ |
1,397 |
|
|
$ |
62,877 |
|
|
$ |
1,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses Less Than 12 Months
Of the $10,000 in unrealized losses that had existed for less than twelve months at March 31,
2011, no security had an unrealized loss in excess of 10% of the securitys cost.
Of the $210,000 in unrealized losses that had existed for less than twelve months at December
31, 2010, no security had an unrealized loss in excess of 10% of the securitys cost.
14
Unrealized Losses 12 Months or Longer
Of the $723,000 in unrealized losses that had existed for twelve months or longer at March 31,
2011, one security classified as Asset-backed in the table above had an unrealized loss in excess
of 10% of the securitys cost. The amount of unrealized loss with respect to that security was
$182,000 at March 31, 2011.
Of the $1.4 million in unrealized losses that had existed for twelve months or longer at
December 31, 2010, one security, classified as Corporate bonds and municipals, had unrealized
losses in excess of 10% of the securitys cost. The amount of unrealized loss with respect to that
security was $620,000 at December 31, 2010.
All issuers of securities we own remain current on all contractual payments. The Company
continually monitors investments with unrealized losses that have existed for twelve months or
longer and considers such factors as the current financial condition of the issuer, credit ratings,
performance of underlying collateral and effective yields. Additionally, HealthMarkets considers
whether it has the intent to sell the security and whether it is more likely than not that the
Company will be required to sell the debt security before the fair value reverts to its cost basis,
which may be at maturity of the security. Based on such review, the Company believes that, as of
March 31, 2011, the unrealized losses in these investments were caused by an increase in market
interest rates and tighter liquidity conditions in the current markets than when the securities
were purchased and therefore, is temporary.
It is at least reasonably probable that the Companys assessment of whether the unrealized
losses are other than temporary may change over time, given, among other things, the dynamic nature
of markets and changes in the Companys assessment of its ability or intent to hold impaired
investment securities, which could result in the Company recognizing other-than-temporary
impairment charges or realized losses on the sale of such investments in the future.
7. STUDENT LOANS
Through its student loan funding vehicles, CFLD-I and UFC2, the Company holds alternative
(i.e., non-federally guaranteed) student loans extended to students at selected colleges and
universities. The Companys insurance subsidiaries previously offered an interest-sensitive whole
life insurance product with a child term rider. The child term rider included a special provision
under which private student loans to help fund the insured childs higher education could be made
available, subject to the terms, conditions and qualifications of the policy and the child term
rider. Pursuant to the terms of the child term rider, the making of any student loan is expressly
conditioned on the availability of a guarantee for the loan at the time the loan is made. During
2003, the Company discontinued offering the child term rider; however, for policies previously
issued, outstanding potential commitments to fund student loans extend through 2026.
As previously disclosed, the Companys arrangements with the party previously originating
student loans terminated in 2010. The Company is attempting to find a replacement for the Companys
previous originator and lender of student loans; however, there can be no assurance whether and
when a new lender will be located. In addition, as discussed above, the making of any student loan
is expressly conditioned on the availability of a guarantee for the loan, and there is no longer a
guarantor for the student loan program. As a result, loans under the child term rider are not
available at this time. The Company does not believe this will have a material impact to the
consolidated financial statements.
15
8. DEBT
The following table sets forth detail of the Companys debt and interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
Principal Amount |
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
at |
|
|
Maturity |
|
|
Interest |
|
|
March 31, |
|
|
|
March 31, 2011 |
|
|
Date |
|
|
Rate(a) |
|
|
2011 |
|
|
2010 |
|
2006 credit agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan |
|
$ |
362,500 |
|
|
|
2012 |
|
|
|
1.303 |
% |
|
$ |
2,358 |
|
|
$ |
3,512 |
|
$75 Million revolver (non-use fee) |
|
|
|
|
|
|
2011 |
|
|
|
|
|
|
|
48 |
|
|
|
70 |
|
Grapevine Note |
|
|
72,350 |
|
|
|
2021 |
|
|
|
6.712 |
% |
|
|
1,197 |
|
|
|
1,199 |
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UICI Capital Trust I |
|
|
15,470 |
|
|
|
2034 |
|
|
|
3.786 |
% |
|
|
147 |
|
|
|
145 |
|
HealthMarkets Capital Trust I |
|
|
51,550 |
|
|
|
2036 |
|
|
|
3.352 |
% |
|
|
432 |
|
|
|
426 |
|
HealthMarkets Capital Trust II |
|
|
51,550 |
|
|
|
2036 |
|
|
|
8.367 |
% |
|
|
1,078 |
|
|
|
1,078 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Deferred Tax Gain |
|
|
|
|
|
|
|
|
|
|
4.000 |
% |
|
|
525 |
|
|
|
525 |
|
Amortization of financing fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,326 |
|
|
|
1,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
553,420 |
|
|
|
|
|
|
|
|
|
|
$ |
7,111 |
|
|
$ |
8,192 |
|
Student Loan Credit Facility |
|
|
65,950 |
|
|
|
(b |
) |
|
|
0.000% |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
619,370 |
|
|
|
|
|
|
|
|
|
|
$ |
7,111 |
|
|
$ |
8,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the interest rate at March 31, 2011. |
|
(b) |
|
The Series 2001A-1 Notes and Series 2001A-2 Notes have a final stated maturity of July
1, 2036; the Series 2002A Notes have a final stated maturity of July 1, 2037 (see Student
Loan Credit Facility discussion below). |
|
(c) |
|
The interest rate on each series of SPE Notes resets monthly in a Dutch auction process and
is capped by several interest rate triggers. It is currently capped at zero by a Net Loan
Rate calculation driven by the rate of return of the student loans less certain allowed note
fees. |
On April 5, 2006, HealthMarkets, LLC entered into a credit agreement, providing for a $500.0
million term loan facility and a $75.0 million revolving credit facility, which includes a $35.0
million letter of credit sub-facility. The full amount of the term loan was drawn at closing. At
March 31, 2011, the Company had an aggregate of $362.5 million of indebtedness outstanding under
the term loan facility, which indebtedness bore interest at the London inter-bank offered rate
(LIBOR) plus a borrowing margin of 1.00%. The Company has not drawn on the $75.0 million
revolving credit facility. Pursuant to the credit agreement, the $75.0 million revolving credit
facility matured on April 5, 2011.
In addition, on April 5, 2006, HealthMarkets Capital Trust I and HealthMarkets Capital Trust
II (two Delaware statutory business trusts, collectively the Trusts) issued $100.0 million of
floating rate trust preferred securities (the Trust Securities) and $3.1 million of floating rate
common securities. The Trusts invested the proceeds from the sale of the Trust Securities,
together with the proceeds from the issuance to HealthMarkets, LLC by the Trusts of the common
securities, in $100.0 million principal amount of HealthMarkets, LLCs Floating Rate Junior
Subordinated Notes due June 15, 2036 (the Notes), of which $50.0 million principal amount accrue
interest at a floating rate equal to three-month LIBOR plus 3.05% and $50.0 million principal
amount accrue interest at a fixed rate of 8.367%.
On April 29, 2004, UICI Capital Trust I (a Delaware statutory business trust, the 2004
Trust) completed the private placement of $15.0 million aggregate issuance amount of floating rate
trust preferred securities with an aggregate liquidation value of $15.0 million (the 2004 Trust
Preferred Securities). The 2004 Trust invested the $15.0 million proceeds from the sale of the
2004 Trust Preferred Securities, together with the proceeds from the issuance to the Company by the
2004 Trust of its floating rate common securities in the amount of $470,000 (the Common
Securities and, collectively with the 2004 Trust Preferred Securities, the 2004 Trust
Securities), in an equivalent face amount of the Companys Floating Rate Junior Subordinated Notes
due 2034 (the 2004 Notes). The 2004 Notes will mature on April 29, 2034. The 2004 Notes accrue
interest at a floating rate equal to three-month LIBOR plus 3.50%, payable quarterly.
On August 16, 2006, Grapevine issued $72.4 million of its senior secured notes (the Grapevine
Notes) to an institutional purchaser. The net proceeds from the Grapevine Notes of $71.9 million
were distributed to HealthMarkets, LLC. The Grapevine Notes bear interest at an annual rate of
6.712%. The interest is to be paid semi-annually on January 15th and July
15th of each year beginning on January 15, 2007. The principal payment is due at
maturity on July 15, 2021. The Grapevine Notes are collateralized by Grapevines assets including
a note receivable in the amount of $78.4 million from a unit of CIGNA Corporation (the CIGNA
Note). Grapevine services its debt primarily from cash receipts from the CIGNA Note. All cash
receipts from the CIGNA Note are paid into a debt service coverage account maintained and held by
an institutional trustee (the Grapevine Trustee) for the benefit of the holder of the Grapevine
Notes. Pursuant to an indenture and direction notices from Grapevine, the Grapevine Trustee uses
the proceeds in the debt service coverage account to (i) make interest payments on the Grapevine
Notes, (ii) pay for certain Grapevine expenses and (iii) distribute cash to HealthMarkets, subject
to satisfaction of certain restricted payment tests.
16
The fair value of the Companys debt, exclusive of indebtedness outstanding under the secured
student loan credit facility, was $501.5 million and $499.2 million at March 31, 2011 and December
31, 2010, respectively. The fair value of such debt is estimated using discounted cash flow
analyses, based on the Companys current incremental borrowing rates for similar types of borrowing
arrangements.
Student Loan Credit Facility
At March 31, 2011 and December 31, 2010, the Company had an aggregate of $66.0 million and
$68.7 million, respectively, of indebtedness outstanding under a secured student loan credit
facility (the Student Loan Credit Facility), which indebtedness is represented by Student Loan
Asset-Backed Notes issued by a bankruptcy-remote special purpose entity (the SPE Notes). At
March 31, 2011 and December 31, 2010, indebtedness outstanding under the Student Loan Credit
Facility was secured by student loans and accrued interest in the carrying amount of $57.9 million
and $60.5 million, respectively, and by a pledge of cash, cash equivalents and other qualified
investments of $8.1 million and $8.0 million, respectively.
The SPE Notes represent obligations solely of the SPE, and not of the Company or any other
subsidiary of the Company. For financial reporting and accounting purposes, the Student Loan Credit
Facility has been classified as a financing as opposed to a sale. Accordingly, in connection with
the financing, the Company recorded no gain on sale of the assets transferred to the SPE.
The SPE Notes were issued by the SPE in three tranches: $50.0 million of Series 2001A-1 Notes
(the Series 2001A -1 Notes) and $50.0 million of Series 2001A-2 Notes (the Series 2001A-2
Notes), both issued on April 27, 2001, and $50.0 million of Series 2002A Notes (the Series 2002A
Notes) issued on April 10, 2002. The interest rate on each series of SPE Notes resets monthly in a
Dutch auction process. The Series 2001A-1 Notes and Series 2001A-2 Notes have a final stated
maturity of July 1, 2036; the Series 2002A Notes have a final stated maturity of July 1, 2037.
Beginning in 2005, the SPE Notes were also subject to mandatory redemption in whole or in part on
each interest payment date from any monies received as a recovery of the principal amount of any
student loan securing payment of the SPE Notes, including scheduled, delinquent and advance
payments, payouts or prepayments. During the three months ended March 31 2011, the Company made
principal payments of approximately $2.7 million on the SPE notes.
At March 31, 2011 and December 31, 2010, the carrying amount of outstanding indebtedness
secured by student loans approximated the fair value, as interest rates on such indebtedness reset
monthly.
9. DERIVATIVES
HealthMarkets uses derivative instruments, specifically interest rate swaps, as part of its
risk management activities to protect against the risk of changes in prevailing interest rates
adversely affecting future cash flows associated with certain debt. The Company accounts for such
interest rate swaps in accordance with ASC Topic 815 Derivatives and Hedging. These swap
agreements are designed as hedging instruments and the Company formally documents qualifying hedged
transactions and hedging instruments, and assesses, both at inception of the contract and on an
ongoing basis, whether the hedging instruments are effective in offsetting changes in cash flows of
the hedged transaction. The Company uses regression analysis to assess the hedge effectiveness in
achieving the offsetting cash flows attributable to the risk being hedged. In addition, the
Company utilizes the hypothetical derivative methodology for the measurement of ineffectiveness.
Derivative gains and losses not effective in hedging the expected cash flows will be recognized
immediately in earnings. In accordance with ASC 820, the fair values of the Companys interest
rate swaps are also contained in Note 5 of Notes to Consolidated Condensed Financial Statements. In
assessing the fair value, the Company takes into consideration the current interest rates and the
current creditworthiness of the counterparties, as well as the current creditworthiness of the
Company, as applicable.
At March 31, 2011, the Company owned one interest rate swap agreement with an aggregate
notional amount of $100 million. The terms of the interest rate swap agreement is 5 years
beginning on April 11, 2006. This interest rate swap matured on April 11, 2011.
17
The Company employs control procedures to validate the reasonableness of valuation estimates
obtained from a third party. The table below represents the fair values of the Companys
derivative assets and liabilities as of March 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
Balance Sheet |
|
|
2011 |
|
|
2010 |
|
|
Balance Sheet |
|
2011 |
|
|
2010 |
|
|
|
Location |
|
|
Fair Value |
|
|
Fair Value |
|
|
Location |
|
Fair Value |
|
|
Fair Value |
|
|
|
(In thousands) |
|
Derivatives
designated as
hedging instruments
under ASC Topic
815: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Other liabilities |
|
$ |
1,177 |
|
|
$ |
2,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
$ |
1,177 |
|
|
$ |
2,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below represents the effect of derivative instruments in hedging relationships
under ASC Topic 815 on the Companys consolidated condensed statements of income for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments in Hedging Relationships for the Three Months Ended March 31, 2011 and 2010 |
|
|
|
|
|
|
|
|
|
|
|
Location of Gain |
|
Amount of Interest |
|
|
Location of (Gain) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from |
|
Expense (Income) |
|
|
Loss Recognized in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Reclassified from |
|
|
Income on |
|
Amount of (Gain) Loss |
|
|
|
Amount of Gain (Loss) |
|
|
OCI into Income |
|
Accumulated OCI |
|
|
Derivative |
|
Recognized in Income on |
|
|
|
Recognized in OCI on |
|
|
(Effective |
|
into Income |
|
|
(Ineffective |
|
Derivative |
|
|
|
Derivative (Effective Portion) |
|
|
Portion) |
|
(Expense) (Effective Portion) |
|
|
Portion) |
|
(Ineffective Portion) |
|
|
|
2011 |
|
|
2010 |
|
|
|
|
2011 |
|
|
2010 |
|
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
$ |
1,240 |
|
|
$ |
2,017 |
|
|
Interest Expense |
|
$ |
1,177 |
|
|
$ |
2,376 |
|
|
Investment income |
|
$ |
66 |
|
|
$ |
128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2011 and 2010, the Company did not have any derivative instruments not designated
as hedging instruments.
There were no components of the derivative instruments that were excluded from the assessment
of hedge effectiveness.
At March 31, 2011, accumulated other comprehensive income included a deferred after-tax net
loss of $65,000 related to the interest rate swaps of which $66,000 ($43,000 net of tax) is the
remaining amount of loss associated with the previous terminated hedging relationship. This amount
will be reclassified into Investment income on the Companys consolidated statement of income
(loss) in conjunction with the interest payments on the variable rate debt in April 2011.
10. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands, except per share |
|
|
|
amounts) |
|
Income from continuing operations |
|
$ |
3,164 |
|
|
$ |
768 |
|
Income from discontinued operations |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
3,178 |
|
|
$ |
782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
|
30,144 |
|
|
|
29,616 |
|
Dilutive effect of stock options and other shares |
|
|
786 |
|
|
|
647 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding, dilutive |
|
|
30,930 |
|
|
|
30,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.11 |
|
|
$ |
0.03 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Net income per share, basic |
|
$ |
0.11 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
From continuing operations |
|
$ |
0.10 |
|
|
$ |
0.03 |
|
From discontinued operations |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
|
|
|
|
|
Net income per share, basic |
|
$ |
0.10 |
|
|
$ |
0.03 |
|
|
|
|
|
|
|
|
18
11. COMMITMENTS AND CONTINGENCIES
Litigation and Regulatory Matters
The Company is a party to various material proceedings, which are described in the Companys
Annual Report on Form 10-K filed for the year ended December 31, 2010 under the caption Item 3
Legal Proceedings. Except as discussed below, during the three month period covered by this
Quarterly Report on Form 10-Q, the Company has not been named in any new material legal proceeding,
and there have been no material developments in the previously reported legal proceedings.
Litigation Matters
As previously disclosed, HealthMarkets, HealthMarkets Lead Marketing Group and Mid-West were
named as defendants in an action filed on December 4, 2006 (Howard Woffinden, individually, and as
Successor in interest to Mary Charlotte Woffinden, deceased v. HealthMarkets, Mid-West, et al.)
pending in the Superior Court for the County of Los Angeles, California, Case No. LT061371.
Plaintiffs alleged several causes of action, including breach of fiduciary duty, negligent failure
to obtain insurance, intentional misrepresentation, fraud by concealment, promissory fraud, civil
conspiracy, professional negligence, intentional infliction of emotional distress, and violation of
the California Consumer Legal Remedies statute, California Civil Code Section 1750, et seq.
Plaintiff sought injunctive relief, and general and punitive monetary damages in an unspecified
amount. On October 5, 2007, the Court granted a motion to quash service of summons for defendants
HealthMarkets and HealthMarkets Lead Marketing Group, removing them from the case. Following a
mandatory settlement conference held on April 19, 2011, the remaining parties settled this matter
on terms that, after consideration of applicable reserves and/or potentially available insurance
coverage benefits, did not have a material adverse effect on the Companys consolidated financial
condition or results of operations.
The Company and its subsidiaries are parties to various other pending and threatened legal
proceedings, claims, demands, disputes and other matters arising in the ordinary course of
business, including some asserting significant liabilities arising from claims, demands, disputes
and other matters with respect to insurance policies, relationships with agents, relationships with
former or current employees and other matters. From time to time, some such matters, where
appropriate, may be the subject of internal investigation by management, the Board of Directors, or
a committee of the Board of Directors.
Given the expense and inherent risks and uncertainties of litigation, we regularly evaluate
litigation matters pending against us, including those described in Note 16 of Notes to the
Companys Consolidated Financial Statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010, to determine if settlement of such matters would be in the
best interests of the Company and its stockholders. The costs associated with any such settlement
could be substantial and, in certain cases, could result in an earnings charge in any particular
quarter in which we enter into a settlement agreement. Although we have recorded litigation
reserves which represent our best estimate on probable losses, both known and incurred but not
reported, our recorded reserves might prove to be inadequate to cover an adverse result or
settlement for extraordinary matters. Therefore, costs associated with the various litigation
matters to which we are subject and any earnings charge recorded in connection with a settlement
agreement could have a material adverse effect on our consolidated results of operations in a
period, depending on the results of our operations for the particular period.
Regulatory Matters
The Companys insurance subsidiaries are subject to various pending market conduct or other
regulatory examinations, inquiries or proceedings arising in the ordinary course of business. As
previously disclosed, these matters include the multi-state market conduct examination of the
Companys principal insurance subsidiaries for the examination period January 1, 2000 through
December 31, 2005, which was resolved on May 29, 2008 through execution of a regulatory settlement
agreement with the states of Washington and Alaska, as lead regulators, and three other
monitoring states Oklahoma, Texas and California (collectively, the Monitoring Regulators).
The settlement agreement provides, among other things, for a re-examination by the Monitoring
Regulators. If the re-examination is unfavorable, the Companys principal insurance subsidiaries
are subject to additional penalties of up to $10 million. In the first quarter of 2011, the
Monitoring Regulators initiated a re-examination to assess performance with respect to the
standards of the regulatory settlement agreement. Reference is made to the discussion of these and
other matters contained in the Companys Annual Report on Form 10-K for the year ended December 31,
2010 under the caption Item 3 Legal Proceedings and in Note 16 of Notes to Consolidated
Financial Statements included in such report. State insurance regulatory agencies have authority to
levy significant fines and penalties and require remedial action resulting from findings
made during the course of such matters. Market conduct or other regulatory examinations,
inquiries or proceedings could result in, among other things, changes in business practices that
require the Company to incur substantial costs. Such results, individually or in combination, could
injure our reputation, cause negative publicity, adversely affect our debt and financial strength
ratings, place us at a competitive disadvantage in marketing or administering our products or
impair our ability to sell insurance policies or retain customers, thereby adversely affecting our
business, and potentially materially adversely affecting the results of operations in a period,
depending on the results of operations for the particular period. Determination by regulatory
authorities that we have engaged in improper conduct could also adversely affect our defense of
various lawsuits.
19
In March 2010, the Patient Protection and Affordable Care Act and a reconciliation measure,
the Health Care and Education Reconciliation Act of 2010 (collectively, the Health Care Reform
Legislation) were signed into law. The Health Care Reform Legislation will result in broad-based
material changes to the United States health care system. The Health Care Reform Legislation is
expected to significantly impact the Companys business, including but not limited to the minimum
medical loss ratio requirements applicable to its insurance subsidiaries as well to health
insurance carriers doing business with Insphere. Provisions of the Health Care Reform Legislation
become effective at various dates over the next several years and a number of additional steps are
required to implement these requirements. Due to the complexity of the Health Care Reform
Legislation, the pending status of certain implementing regulations and interpretive guidance, and
gradual implementation, the full impact of Health Care Reform Legislation on the Companys business
is not yet fully known. However, we have made material changes to our business as a result of the
Health Care Reform Legislation, including, to the extent required by this legislation, adjustments
to our in-force block of business issued prior to March 24, 2010. These adjustments include, but
are not limited to, removal of lifetime maximums on benefits, extension of dependent coverage
through age 26, meeting new HHS reporting requirements and adopting limitations on most policy
rescissions. These changes generally became effective on January 1, 2011 (for most of our plans
the effective date of the new plan year), although certain states may require an earlier effective
date. In addition to these changes, health benefit plans issued on or after March 24, 2010 are
subject to more extensive benefit changes, including but not limited to first dollar preventive
care benefits and no annual limits on essential benefits covered by the policies. The Company has
made all state form and rate filings necessary to include these new requirements in the limited
number of states in which our insurance subsidiaries continue to offer health benefit plans. The
Companys review of the requirements of the Health Care Reform Legislation, and its potential
impact on the Companys health insurance product offerings, is ongoing and we expect to dedicate
additional material resources and to incur material expenses (including but not limited to
additional claims expenses) as a result of Health Care Reform Legislation. Depending on the outcome
of certain potential developments with respect to the Health Care Reform Legislation, this
legislation could have a material adverse effect on the Companys financial condition and results
of operations. With respect to the minimum loss ratio requirements effective beginning in 2011, a
mandated minimum loss ratio of 80% for the individual and small group markets is expected to have a
significant impact on the revenues of our insurance subsidiaries and our business generally. In
addition, beginning in 2011, the mandated medical loss ratio requirements have adversely affected
the level of base commissions and override commissions that Insphere receives from the Companys
insurance subsidiaries and third party insurance carriers. For additional information, see the
caption entitled Business Regulatory and Legislative Matters in the Companys Annual Report on
Form 10-K for the year ended December 31, 2010.
12. STOCKHOLDERS EQUITY
The Companys Board of Directors determines the prevailing fair market value of the
HealthMarkets Class A-1 and A-2 common stock in good faith, considering factors it deems
appropriate. Since the de-listing of the Companys stock in 2006, the Company has generally
retained several independent investment firms to value its common stock on an annual basis, or more
frequently if circumstances warrant. When setting the fair market value of the Companys common
stock, the Board considers among other factors it deems appropriate, each independent investment
firms valuation for reasonableness in light of known and expected circumstances.
As of March 31, 2011, the fair market value of the Companys Class A-1 and Class A-2 common
stock, as determined by the Board of Directors, was $9.35.
As previously disclosed above in Note 2 Change in Accounting Principle, the Company changed
the method used to calculate its policy liabilities for the majority of its health insurance
products. As a result of this change in accounting principle, effective January 1, 2011, the
Company increased its retained earnings by an amount of $27.8 million.
20
13. SEGMENT INFORMATION
The Company operates four business segments: Commercial Health, Insphere, Corporate, and
Disposed Operations. Through our Commercial Health Division, we administer a broad range of health
insurance products. Insphere includes net commission revenue, agent incentives, marketing costs and costs associated with the creation
and development of Insphere. Corporate includes investment income not allocated to the other
segments, realized gains or losses, interest expense on corporate debt, the Companys student loan
business, general expenses relating to corporate operations and operations that do not constitute
reportable operating segments. Disposed Operations includes the remaining run out of the Other
Insurance Division as well as the residual operations from the disposition and wind down of other
businesses prior to 2010.
Allocations of investment income and certain general expenses are based on a number of
assumptions and estimates, and the business segments reported operating results would change if
different allocation methods were applied. Certain assets are not individually identifiable by
segment and, accordingly, have been allocated by formulas. Segment revenues include premiums and
other policy charges and considerations, net investment income, commission revenue, fees and other
income. Management does not allocate income taxes to segments. Transactions between reportable
segments are accounted for under respective agreements, which provide for such transactions
generally at cost.
Revenue from continuing operations, income from continuing operations before income taxes, and
assets by operating segment are set forth in the tables below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Revenue from continuing operations: |
|
|
|
|
|
|
|
|
Commercial Health Division: |
|
$ |
162,523 |
|
|
$ |
223,146 |
|
Insphere: |
|
|
16,387 |
|
|
|
4,171 |
|
Corporate: |
|
|
9,529 |
|
|
|
5,714 |
|
Intersegment Eliminations: |
|
|
(3,819 |
) |
|
|
(2,115 |
) |
|
|
|
|
|
|
|
Total revenues excluding disposed operations |
|
|
184,620 |
|
|
|
230,916 |
|
Disposed Operations: |
|
|
404 |
|
|
|
647 |
|
|
|
|
|
|
|
|
Total revenue from continuing operations |
|
$ |
185,024 |
|
|
$ |
231,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Income (loss) from continuing operations before federal income taxes: |
|
|
|
|
|
|
|
|
Commercial Health Division: |
|
$ |
23,346 |
|
|
$ |
41,225 |
|
Insphere: |
|
|
(12,826 |
) |
|
|
(22,861 |
) |
Corporate: |
|
|
(6,000 |
) |
|
|
(17,306 |
) |
|
|
|
|
|
|
|
Total operating income excluding disposed operations |
|
|
4,520 |
|
|
|
1,058 |
|
Disposed Operations |
|
|
661 |
|
|
|
658 |
|
|
|
|
|
|
|
|
Total income from continuing operations before federal income taxes |
|
$ |
5,181 |
|
|
$ |
1,716 |
|
|
|
|
|
|
|
|
Assets by operating segment at March 31, 2011 and December 31, 2010 are set forth in the
table below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Commercial Health Division: |
|
$ |
442,527 |
|
|
$ |
490,088 |
|
Insphere: |
|
|
70,575 |
|
|
|
77,139 |
|
Corporate: |
|
|
796,490 |
|
|
|
769,105 |
|
|
|
|
|
|
|
|
Total assets excluding assets of Disposed Operations |
|
|
1,309,592 |
|
|
|
1,336,332 |
|
Disposed Operations |
|
|
374,364 |
|
|
|
383,319 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,683,956 |
|
|
$ |
1,719,651 |
|
|
|
|
|
|
|
|
Disposed Operations assets at March 31, 2011 and December 31, 2010 primarily represent a
reinsurance recoverable for the ceding of the former Life Insurance Division business as a result
of coinsurance agreements entered into in 2008.
14. AGENT AND EMPLOYEE STOCK-BASED COMPENSATION PLANS
Stock Plan Awards
In March 2011, the Company granted an aggregate of 15,000 non-qualified stock option awards to
two Directors of the Company under the Second Amended and Restated HealthMarkets 2006 Management
Options Plan. Each of the awards vests in 20% increments over five years. The stock options have
an exercise price equal to the fair market value per share at the date of grant.
21
InVest Stock Ownership Plan
In connection with the reorganization of the Companys agent sales force into an independent
career-agent distribution company, and the launch of Insphere, effective January 1, 2010, the
series of stock accumulation plans established for the benefit of the independent contractor
insurance agents and contractor sales representatives (the Predecessor Plans) were superseded and
replaced by the HealthMarkets, Inc. InVest Stock Ownership Plan (ISOP). Eligible insurance agents
and designated eligible employees may participate in the ISOP. Accounts under the Predecessor
Plans were transferred to the ISOP. Several features of the ISOP differ in certain material
respects from the Predecessor Plans, including, but not limited to, plan participation by
designated eligible employees and the elimination of the reallocation of forfeited matching account
credits after June 30, 2010.
For financial reporting purposes, the Company accounts for the Company-match feature of the
ISOP for nonemployee agents by recognizing compensation expense over the vesting period in an
amount equal to the fair market value of vested shares at the date of their vesting and
distribution to the agent-participant. The Company accounts for the Company-match feature of the
ISOP for employees by recognizing compensation expense over the vesting period in an amount equal
to the fair market value of each award at the date of grant, or, in the case of outstanding awards
transferred from the Predecessor Plans, the fair market value at the date of employment. Expense on
awards granted after January 1, 2010, is recognized on a straight-line basis based on the Companys
policy adopted in 2006 for new plans effective after January 1, 2006. Expense on awards transferred
from Predecessor Plans will continue to be recognized on a graded basis. Employee awards are
equity-classified and changes in values and expense are offset to the Companys Additional Paid-in
Capital account on its balance sheet. Nonemployee awards are liability-classified and changes are
reflected in the Other Liabilities account on the balance sheet. The liability for nonemployee
awards is based on (i) the number of unvested credits, (ii) the prevailing fair market value of the
Companys common stock as determined by the Companys Board of Directors and (iii) an estimate of
the percentage of the vesting period that has elapsed.
The accounting treatment of matching credits for nonemployee agent-participants result in
unpredictable stock-based compensation charges, dependent upon fluctuations in the fair market
value of the Companys common stock, as determined by the Companys Board of Directors. In periods
of decline in the fair market value of HealthMarkets common stock, the Company will recognize less
stock-based compensation expense than in periods of appreciation. In addition, in circumstances
where increases in the fair market value of the Companys common stock are followed by declines,
negative stock-based compensation expense may result as the cumulative liability for unvested
stock-based compensation expense is adjusted.
The Company recognized $1.1 million and ($485,000) of expense (benefit) for the three months
ended March 31, 2011 and 2010, respectively, in connection with the ISOP. The liability for
nonemployee participation in the ISOP decreased $2.8 million for the three months ended March 31,
2011. Approximately, $3.6 million of the liability decrease is the result of vesting of awards
which was offset by additional expense recognized during the quarter. Paid in capital for employee
awards under the ISOP increased $262,000 for the three months ended March 31, 2011.
15. TRANSACTIONS WITH RELATED PARTIES
As of March 31, 2011, affiliates of The Blackstone Group, Goldman Sachs Capital Partners and
DLJ Merchant Banking Partners (the Private Equity Investors) held 52.4%, 21.5%, and 10.8%,
respectively, of the Companys outstanding equity securities. Certain members of the Board of
Directors of the Company are affiliated with the Private Equity Investors.
Transactions with the Private Equity Investors
Transaction and Monitoring Fee Agreements
Each of the Private Equity Investors provides to the Company ongoing monitoring, advisory and
consulting services pursuant to Transaction and Monitoring Fee Agreements, for which the Company
pays The Blackstone Group, Goldman Sachs Capital Partners and DLJ Merchant Banking Partners, in the
aggregate, annual monitoring fees of at least $12.5 million. The annual monitoring fees are, in
each case, subject to an upward adjustment in each year based on the ratio of the Companys
consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) in such year
to consolidated EBITDA in the prior year, provided that the aggregate monitoring fees paid to all
advisors pursuant to the Transaction and Monitoring Fee Agreements in any year shall not exceed the
greater of $15.0 million or 3% of consolidated EBITDA in such year. Of the aggregate annual
monitoring fees of $12.5 million paid in January 2011, $7.7 million was paid to The Blackstone
Group, $3.2 million was paid to Goldman Sachs Capital Partners and $1.6 million was paid to DLJ
Merchant Banking Partners. The Company has expensed $3.1 million through March 31, 2011.
22
Investment in Certain Funds Affiliated with the Private Equity Investors
On April 20, 2007, the Companys Board of Directors approved a $10.0 million investment by
Mid-West in Goldman Sachs Real Estate Partners, L.P., a commercial real estate fund managed by an
affiliate of Goldman Sachs Capital Partners. The Company has committed such investment to be funded
over a series of capital calls. During the three months March 31, 2011, the Company did not fund
any capital calls. As of March 31, 2011, the Company had a remaining commitment to Goldman Sachs
Real Estate Partners, L.P. of $1.6 million.
On April 20, 2007, the Companys Board of Directors approved a $10.0 million investment by
MEGA in Blackstone Strategic Alliance Fund L.P., a hedge fund of funds managed by an affiliate of
The Blackstone Group. The Company has committed such investment to be funded over a series of
capital calls. During the three months ended March 31, 2011, the Company funded a capital call in
the amount of $132,000 and received a capital distribution of $317,000 and received a distribution
of earnings of $111,000. As of March 31, 2011, the Company had a remaining commitment to The
Blackstone Strategic Alliance Fund L.P. of $458,000.
23
|
|
|
ITEM 2 |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statements Regarding Forward-Looking Statements
In this report, unless the context otherwise requires, the terms Company, HealthMarkets,
we, us, or our refer to HealthMarkets, Inc. and its subsidiaries. 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 managements expectations at the time such statements are made. 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. Forward-looking statements are subject to
risks and uncertainties that could cause the Companys actual results to differ materially from
those contemplated in the statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. All statements, other than statements of historical information
provided or incorporated by reference herein, may be deemed to be forward-looking statements.
Without limiting the foregoing, when used in written documents or oral presentations, the terms
anticipate, believe, estimate, expect, may, objective, plan, possible, potential,
project, will 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 impact the Companys business and financial prospects include, but
are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December
31, 2010 under the caption Item 1 Business, Item 1A. Risk Factors and Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations and those discussed from
time to time in the Companys various filings with the Securities and Exchange Commission or in
other publicly disseminated written documents.
Introduction
HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in
its wholly owned subsidiary, HealthMarkets, LLC. HealthMarkets, LLCs principal assets are its
investments in its separate operating subsidiaries, including its regulated insurance subsidiaries.
HealthMarkets conducts its insurance underwriting businesses through its indirect wholly owned
insurance company subsidiaries, The MEGA Life and Health Insurance Company (MEGA), Mid-West
National Life Insurance Company of Tennessee (Mid-West) and The Chesapeake Life Insurance Company
(Chesapeake), and conducts its insurance distribution business through its indirect insurance
agency subsidiary, Insphere Insurance Solutions, Inc. (Insphere)
Through our Commercial Health Division, we administer a broad range of health insurance
products for individuals, families, the self-employed and small businesses. Our plans are designed
to accommodate individual needs and include basic hospital-medical expense plans, plans with
preferred provider organization features, catastrophic hospital expense plans, as well as other
supplemental types of coverage. We currently market these products to the self-employed and
individual markets through independent agents contracted with Insphere in a limited number of
states in which Insphere does not have access to third-party health benefit plans.
During 2009, the Company formed Insphere, a Delaware corporation and a wholly owned subsidiary
of HealthMarkets, LLC. Insphere is a distribution company that specializes in meeting the life,
health, long-term care and retirement insurance needs of small businesses and middle-income
individuals and families through its portfolio of products from nationally recognized insurance
carriers. Insphere is an authorized agency in all 50 states and the District of
Columbia. As of March 31, 2011, Insphere had approximately 3,000 independent agents, of which
approximately 1,900 on average write health insurance applications each month, and offices in over
33 states. Insphere distributes products underwritten by the Companys insurance company
subsidiaries, as well as non-affiliated insurance companies. Insphere has completed marketing
agreements with a number of non-affiliated life, health, long-term care and retirement insurance
carriers, including, but not limited to, Aetna, Humana and UnitedHealthcares Golden Rule Insurance
Company for individual health insurance products.
As a result of the enactment of Health Care Reform Legislation, as well as the growing
emphasis on the distribution of third party products through Insphere, in the second quarter of
2010, the Company determined that it would discontinue the sale of the Companys traditional
scheduled benefit health insurance products. After September 23, 2010, the effective date for
many aspects of the Health Care Reform Legislation, the Company discontinued marketing all of its
health benefit plans in all but a limited number of states in which Insphere does not currently
have access to third-party health benefit plans. For additional information, see the caption
entitled Business Commercial Health Division in the Companys Annual Report on Form 10-K for
the year ended December 31, 2010.
24
Results of Operations
The table below sets forth certain summary information about the Companys operating results
for the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
REVENUE |
|
|
|
|
|
|
|
|
Health premiums |
|
$ |
151,201 |
|
|
$ |
205,773 |
|
Life premiums and other considerations |
|
|
466 |
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
151,667 |
|
|
|
206,424 |
|
Investment income |
|
|
8,965 |
|
|
|
11,271 |
|
Other income |
|
|
20,534 |
|
|
|
13,649 |
|
Other-than-temporary impairment losses |
|
|
|
|
|
|
|
|
Realized gains, net |
|
|
3,858 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
185,024 |
|
|
|
231,563 |
|
BENEFITS AND EXPENSES |
|
|
|
|
|
|
|
|
Benefits, claims, and settlement expenses |
|
|
103,966 |
|
|
|
121,796 |
|
Underwriting, acquisition, and insurance expenses |
|
|
30,231 |
|
|
|
53,589 |
|
Other expenses |
|
|
38,535 |
|
|
|
46,270 |
|
Interest expense |
|
|
7,111 |
|
|
|
8,192 |
|
|
|
|
|
|
|
|
|
|
|
179,843 |
|
|
|
229,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
5,181 |
|
|
|
1,716 |
|
Federal income taxes |
|
|
2,017 |
|
|
|
948 |
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
3,164 |
|
|
|
768 |
|
Income from discontinued operations, net |
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,178 |
|
|
$ |
782 |
|
|
|
|
|
|
|
|
National Health Care Reform Legislation
In March 2010, Health Care Reform Legislation was signed into law, which will result in
broad-based material changes to the United States health care system. The Health Care Reform
Legislation is expected to significantly impact our business, including but not limited to the
minimum medical loss ratio requirements applicable to our insurance subsidiaries as well to health
insurance carriers doing business with Insphere. Provisions of the Health Care Reform Legislation
become effective at various dates over the next several years and a number of additional steps are
required to implement these requirements. Due to the complexity of the Health Care Reform
Legislation, the pending status of certain implementing regulations and interpretive guidance, and
gradual implementation, the full impact of Health Care Reform Legislation on our business is not
yet fully known. However, we have dedicated material resources and, in the future, expect to
dedicate additional material resources and to incur material expenses (including but not limited to
additional claims expenses) as a result of Health Care Reform Legislation.
With respect to the minimum loss ratio requirements effective beginning in 2011, a mandated
minimum loss ratio of 80% for the individual and small group markets is expected to have a
significant impact on the revenues of our insurance subsidiaries and our business generally.
Subject to the outcome of final rulemaking, a minimum medical loss ratio at or near the 80% level
could, at an appropriate time in the future, compel us to issue rebates to customers, discontinue
the underwriting and marketing of individual health insurance and/or to non-renew coverage of our
existing individual health customers in one or more states pursuant to applicable state and federal
requirements.
In addition, beginning in 2011, the mandated medical loss ratio requirements have adversely
affected the level of base commissions and override commissions that Insphere receives from the
Companys insurance subsidiaries and third party insurance carriers. In order to comply with the
80% minimum medical loss ratio requirement, many of these carriers, including the Companys
insurance subsidiaries, have reduced commissions and overrides. In the fourth quarter of 2010,
Insphere received notice from a number of its health carriers that compensation levels in 2011
would be significantly lower than 2010 levels. As a result of these reductions, Insphere has
lowered the level of commissions paid to its agents for the sale of products underwritten by these
carriers. At this time, we are not able to project with certainty the full extent to which the
minimum medical loss ratio requirement will impact our revenues and results of operations, but the
impact is expected to be material.
25
To the extent required by the Health Care Reform Legislation, the Company has made the
adjustments to its in-force block of business issued prior to March 24, 2010, including but not
limited to removal of lifetime maximums on benefits, extension of dependent coverage through age
26, meeting new HHS reporting requirements and adopting limitations on most policy rescissions.
These changes generally became effective on January 1, 2011 (for most of our plans the effective date of the new plan year), although certain states may require an earlier
effective date. In addition to the changes discussed above, plans issued on or after March 24,
2010 are subject to more extensive benefit changes, including but not limited to first dollar
preventive care benefits and no annual limits on essential benefits covered by the policies. The
Company has made all state form and rate filings necessary to include these new requirements in the
limited number of states in which our insurance subsidiaries continue to offer health benefit
plans. The Companys review of the requirements of the Health Care Reform Legislation, and its
potential impact on the Companys health insurance product offerings, is ongoing.
For additional information, see the caption entitled Business Regulatory and Legislative
Matters in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Business Segments
The Company operates four business segments: Commercial Health, Insphere, Corporate, and
Disposed Operations. Through our Commercial Health Division, we administer a broad range of health
insurance products. Insphere includes net commission revenue, agent incentives, marketing costs and
costs associated with the creation and development of Insphere. Corporate includes investment
income not allocated to the other segments, realized gains or losses, interest expense on corporate
debt, the Companys student loan business, general expenses relating to corporate operations and
operations that do not constitute reportable operating segments. Disposed Operations includes the
remaining run out of the former Medicare Division and the former Other Insurance Division as well
as the residual operations from the disposition of other businesses prior to 2010.
Allocations of investment income and certain general expenses are based on a number of
assumptions and estimates, and the business segments reported operating results would change if
different allocation methods were applied. Certain assets are not individually identifiable by
segment and, accordingly, have been allocated by formulas. Segment revenues include premiums and
other policy charges and considerations, net investment income, commission revenue, fees and other
income. Management does not allocate income taxes to segments. Transactions between reportable
segments are accounted for under respective agreements, which provide for such transactions
generally at cost.
Revenue from continuing operations, income from continuing operations before income taxes, and
assets by operating segment are set forth in the tables below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Revenue from continuing operations: |
|
|
|
|
|
|
|
|
Commercial Health Division: |
|
$ |
162,523 |
|
|
$ |
223,146 |
|
Insphere: |
|
|
16,387 |
|
|
|
4,171 |
|
Corporate: |
|
|
9,529 |
|
|
|
5,714 |
|
Intersegment Eliminations: |
|
|
(3,819 |
) |
|
|
(2,115 |
) |
|
|
|
|
|
|
|
Total revenues excluding disposed operations |
|
|
184,620 |
|
|
|
230,916 |
|
Disposed Operations: |
|
|
404 |
|
|
|
647 |
|
|
|
|
|
|
|
|
Total revenue from continuing operations |
|
$ |
185,024 |
|
|
$ |
231,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Income (loss) from continuing operations before federal income taxes: |
|
|
|
|
|
|
|
|
Commercial Health Division: |
|
$ |
23,346 |
|
|
$ |
41,225 |
|
Insphere: |
|
|
(12,826 |
) |
|
|
(22,861 |
) |
Corporate: |
|
|
(6,000 |
) |
|
|
(17,306 |
) |
|
|
|
|
|
|
|
Total operating income excluding disposed operations |
|
|
4,520 |
|
|
|
1,058 |
|
Disposed Operations |
|
|
661 |
|
|
|
658 |
|
|
|
|
|
|
|
|
Total income from continuing operations before federal income taxes |
|
$ |
5,181 |
|
|
$ |
1,716 |
|
|
|
|
|
|
|
|
26
Commercial Health Division
Set forth below is certain summary financial and operating data for the Companys Commercial
Health Division for the three months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
Earned premium revenue |
|
$ |
151,667 |
|
|
$ |
206,238 |
|
Investment income |
|
|
3,578 |
|
|
|
5,850 |
|
Other income |
|
|
7,278 |
|
|
|
11,058 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
162,523 |
|
|
|
223,146 |
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
Benefit expenses |
|
|
104,400 |
|
|
|
122,320 |
|
Underwriting and policy acquisition expenses |
|
|
32,653 |
|
|
|
54,328 |
|
Other expenses |
|
|
2,124 |
|
|
|
5,273 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
139,177 |
|
|
|
181,921 |
|
|
|
|
|
|
|
|
Operating income |
|
$ |
23,346 |
|
|
$ |
41,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data: |
|
|
|
|
|
|
|
|
Loss ratio |
|
|
68.8 |
% |
|
|
59.3 |
% |
Expense ratio |
|
|
21.5 |
% |
|
|
26.3 |
% |
|
|
|
|
|
|
|
Combined ratio |
|
|
90.3 |
% |
|
|
85.6 |
% |
Submitted annualized volume |
|
$ |
15,629 |
|
|
$ |
22,580 |
|
Loss Ratio. The loss ratio is defined as benefits expense as a percentage of earned premium
revenue.
|
|
Expense Ratio. The expense ratio is defined as underwriting, acquisition and insurance
expenses as a percentage of earned premium revenue. |
|
|
Submitted Annualized Volume. Submitted annualized premium volume in any period is the
aggregate annualized premium amount associated with health insurance applications submitted
by the Companys agents in such period for underwriting by the Companys insurance
subsidiaries. |
Three Months Ended March 31, 2011 versus 2010
The Commercial Health Division reported earned premium revenue of $151.7 million during the
three months ended March 31, 2011 compared to $206.2 million in the corresponding period of 2010, a
decrease of $54.5 million or 26.4%, which is due to a decrease in policies in force. The decrease
in policies in force reflects an attrition rate that exceeds the pace of new sales, and is evident
in the reduction in submitted annualized premium volume in the table above. The decrease in
submitted annualized premium volume reflects the emphasis on the distribution of health insurance
products underwritten by non-affiliated carriers and the discontinuation in marketing health
benefit plans underwritten by the Companys insurance subsidiaries in all but a limited number of
states.
The Commercial Health Division reported operating income of $23.3 million in 2011 compared to
operating income of $41.2 million in 2010, a decrease of $17.9 million or 43.4%. Operating income
as a percentage of earned premium revenue (i.e., operating margin) for 2011 was 15.4% compared to
the operating margin of 20.0% in 2010, which is generally attributable to an increase in the loss
ratio, as a result of the new minimum loss ratio requirements and certain large claims incurred
during the period as a result of the removal of lifetime limits. The impact on the operating margin
from the increased loss ratio in 2011 was partially offset by a continued decrease in underwriting,
acquisition and insurance expenses reflecting the Companys ongoing cost reduction initiatives.
Underwriting, acquisition and insurance expenses decreased by $21.6 million, or 39.8%, to
$32.7 million in 2011 from $54.3 million in 2010. This decrease reflects the variable nature of
commission expenses and premium taxes included in these amounts which generally vary in proportion
to earned premium revenue. Additionally, beginning in the fourth quarter of 2008, we initiated
certain cost reduction programs which are being reflected as a decrease in the expense ratio.
Other income and other expenses both decreased in the current period compared to the prior
year period. Other income largely consists of fee and other income received for sales of
association memberships prior to the formation of Insphere, for which other expenses are incurred
for bonuses and other compensation provided to the agents. The majority of these association
memberships were sold along with health policies and as premium continues to decrease we expect the
revenue and expense generated from these association memberships to decrease also.
27
Insphere
During the second quarter of 2009, we formed Insphere, an authorized insurance agency in 50
states and the District of Columbia specializing in small business and middle-income market life,
health, long-term care and retirement insurance. Insphere distributes products underwritten by our
insurance subsidiaries, as well as non-affiliated insurance companies.
Set forth below is certain summary financial and operating data for Insphere for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
|
|
|
|
|
|
|
Commission revenue |
|
$ |
15,913 |
|
|
$ |
4,084 |
|
Investment income |
|
|
240 |
|
|
|
21 |
|
Other income |
|
|
234 |
|
|
|
66 |
|
|
|
|
|
|
|
|
Total revenue |
|
|
16,387 |
|
|
|
4,171 |
|
Expenses |
|
|
|
|
|
|
|
|
Commission expenses |
|
|
8,558 |
|
|
|
1,802 |
|
Agent incentives |
|
|
5,867 |
|
|
|
6,345 |
|
Other expenses |
|
|
14,788 |
|
|
|
18,885 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
29,213 |
|
|
|
27,032 |
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(12,826 |
) |
|
$ |
(22,861 |
) |
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 versus 2010
For the three months ended March 31, 2011, the Company earned commission revenue of
approximately $15.9 million of which $2.7 million was generated from the sale of insurance products
underwritten by the Companys insurance subsidiaries. The remaining amount of $13.2 million was
generated from third-party carriers with approximately 88% generated from four carriers. Insphere
did not begin writing business until the fourth quarter of 2009 and as a result the revenue for the
first quarter ended March 31, 2011 is significantly greater than the comparable period in 2010. In
response to Health Care Reform Legislation, beginning in 2011, both the Companys insurance
subsidiaries and certain third-party carriers have decreased the levels of commission paid to
Insphere.
Commission expense of $8.6 million includes commissions and overrides paid to our independent
agents. Commissions are generally based on a percentage of the premiums paid by the insured to the
carrier. The increase in commission expense over the prior year primarily trends with commission
revenue. However, beginning in the third quarter of 2010, Insphere increased its commission rates
paid to its agents to incorporate some of the costs previously included in agent incentives.
Agent incentives of $5.9 million primarily include production and agent recruiting bonuses
paid to our independent agents as well as lead generation costs incurred to facilitate the
production of commission revenue. The decrease from prior year reflects the adjustment to
commission rates to incorporate some of these costs as discussed above. In addition, beginning in
last half of 2010, the agents started sharing some of the costs of purchasing customer leads which
reduced some of the lead generation costs for the Company.
For the three months ended March 31, 2011, Insphere reported other expenses of $14.8 million.
Other expenses associated with Insphere are related to employee compensation, costs associated with
our field offices, depreciation and amortization, and other administrative expenses. Other
expenses in 2010 reflect a significant amount of developmental costs.
Corporate
Corporate includes investment income not otherwise allocated to the other segments, realized
gains and losses on sales, interest expense on corporate debt, the Companys student loan business,
general expense relating to corporate operations and operations that do not constitute reportable
operating segments.
28
Set forth below is a summary of the components of operating loss at Corporate for the three
months ended March 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(In thousands) |
|
Operating loss: |
|
|
|
|
|
|
|
|
Investment income on equity |
|
$ |
4,169 |
|
|
$ |
3,985 |
|
Realized gains, net |
|
|
3,858 |
|
|
|
219 |
|
Interest expense on corporate debt |
|
|
(7,110 |
) |
|
|
(8,192 |
) |
Student loan operations |
|
|
8 |
|
|
|
(116 |
) |
General corporate expenses and other |
|
|
(6,925 |
) |
|
|
(13,202 |
) |
|
|
|
|
|
|
|
Operating loss |
|
$ |
(6,000 |
) |
|
$ |
(17,306 |
) |
|
|
|
|
|
|
|
Three Months Ended March 31, 2011 versus 2010
Corporate reported an operating loss in 2011 of $6.0 million compared to $17.3 million in 2010
for an overall decrease in the operating loss of $11.3 million. The change in operating loss is
primarily due to the following items:
|
|
|
The Company recognized realized gains of $3.9 million and $219,000 during the
three months ended March 31, 2011 and 2010, respectively. The realized gains
resulted from the sales of various fixed maturities. |
|
|
|
Interest expense on corporate debt decreased for the three months ended March 31,
2011 compared to the same period in 2010 as a result of the maturing of one of the
Companys interest rate swaps in April 2010. The Companys interest rate swaps caused
the Company to pay a fixed rate higher than the current variable rate incurred on the
debt. As discussed above in Note 9, the Companys remaining interest rate swap
expired on April 11, 2011. |
|
|
|
General corporate expenses and other decreased by $6.3 million from the prior
year. The decrease in the expenses are primarily due to a reduction in salaries and
related expenses by $4.8 million and a reduction in employee severance by $3.1
million partially offset by an increase in costs incurred with the agent stock plan. |
Liquidity and Capital Resources
Consolidated Operations
Historically, the Companys primary sources of cash on a consolidated basis have been premium
revenue from policies issued, investment income, and fees and other income. The primary uses of
cash have been payments for benefits, claims and commissions under those policies, servicing of the
Companys debt obligations, and operating expenses.
The Company has entered into several financing agreements designed to strengthen both its
capital base and liquidity, the most significant of which are described below. The following table
also sets forth additional information with respect to the Companys debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate at |
|
|
March 31, |
|
|
December 31, |
|
|
|
Maturity Date |
|
|
March 31, 2011 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2006 credit agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan |
|
|
2012 |
|
|
|
1.303 |
% |
|
$ |
362,500 |
|
|
$ |
362,500 |
|
$75 million revolver |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grapevine Note |
|
|
2021 |
|
|
|
6.712 |
% |
|
|
72,350 |
|
|
|
72,350 |
|
Trust preferred securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UICI Capital Trust I |
|
|
2034 |
|
|
|
3.786 |
% |
|
|
15,470 |
|
|
|
15,470 |
|
HealthMarkets Capital Trust I |
|
|
2036 |
|
|
|
3.352 |
% |
|
|
51,550 |
|
|
|
51,550 |
|
HealthMarkets Capital Trust II |
|
|
2036 |
|
|
|
8.367 |
% |
|
|
51,550 |
|
|
|
51,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
553,420 |
|
|
$ |
553,420 |
|
Student Loan Credit Facility |
|
|
(a |
) |
|
|
0.000 |
%(b) |
|
|
65,950 |
|
|
|
68,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
619,370 |
|
|
$ |
622,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The Series 2001A-1 Notes and Series 2001A-2 Notes have a final stated maturity
of July 1, 2036; the Series 2002A Notes have a final stated maturity of July 1, 2037.
See Note 7 of Notes to Consolidated Condensed Financial Statements. |
|
(b) |
|
The interest rate on each series of notes resets monthly in a Dutch auction
process. See Note 7 of Notes to Consolidated Condensed Financial Statements for
additional information on the Student Loan Credit Facility. |
29
In April 2006, the Company borrowed $500.0 million under a term loan credit facility and
issued $100.0 million of Floating Rate Junior Subordinated Notes. See Note 8 of Notes to
Consolidated Condensed Financial Statements for additional disclosure regarding the Companys debt.
We regularly monitor our liquidity position, including cash levels, credit line, principal
investment commitments, interest and principal payments on debt, capital expenditures and matters
relating to liquidity and to compliance with regulatory requirements. We maintain a line of credit
in excess of anticipated liquidity requirements. As of March 31, 2011, HealthMarkets had a $75.0
million unused line of credit. Pursuant to the credit agreement, the $75.0 million revolving credit
facility matured on April 5, 2011.
Holding Company
HealthMarkets, Inc. is a holding company, the principal asset of which is its investment in
its wholly owned subsidiary, HealthMarkets, LLC (collectively referred to as the holding
company). The holding companys ability to fund its cash requirements is largely dependent upon
its ability to access cash, by means of dividends or other means, from its separate operating
subsidiaries, including its regulated insurance subsidiaries and Insphere.
Domestic insurance companies require prior approval by insurance regulatory authorities for
the payment of dividends that exceed certain limitations based on statutory surplus and net income.
During 2011, based on the 2010 statutory net income and statutory capital and surplus levels, the
Companys domestic insurance companies are eligible to pay, without prior approval of the
regulatory authorities, aggregate dividends in the ordinary course of business to HealthMarkets,
LLC of approximately $169.4 million. The Companys domestic insurance companies paid dividends of
$65.0 million to HealthMarkets, LLC through March 31, 2011.
As it has done in the past, the Company will continue to assess the results of operations of
the regulated domestic insurance companies to determine the prudent dividend capability of the
subsidiaries. This is consistent with our practice of maintaining risk-based capital ratios at each
of our domestic insurance subsidiaries significantly in excess of minimum requirements.
HealthMarkets, LLC provides working capital to its wholly-owned subsidiary, Insphere, pursuant
to a $100 million Loan Agreement. As of March 31, 2011 and December 31, 2010, Insphere had an
outstanding balance owed to HealthMarkets, LLC of $87.2 million and $79.9 million, respectively.
At March 31, 2011, HealthMarkets, Inc. and HealthMarkets, LLC, in the aggregate, held cash and
cash equivalents in the amount of $207.7 million.
Contractual Obligations and Off Balance Sheet Arrangements
A summary of HealthMarkets contractual obligations is included in the Companys Annual Report
on Form 10-K for the year ended December 31, 2010. There have been no material changes in the
Companys contractual obligations or off balance sheet commitments since December 31, 2010.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operations are
based on its consolidated condensed financial statements, which have been prepared in accordance
with United States generally accepted accounting principles. The preparation of these consolidated
condensed financial statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those
related to the valuation of assets and liabilities requiring fair value estimates, including
investments and allowance for bad debts, the amount of health and life insurance claims and
liabilities, the realization of deferred acquisition costs, the carrying value of goodwill and
intangible assets, the amortization period of intangible assets, stock-based compensation plan
forfeitures, the realization of deferred taxes, reserves for contingencies, including reserves for
losses in connection with unresolved legal matters and other matters that affect the reported
amounts and disclosure of contingencies in the financial statements. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
Reference is made to the discussion of these critical accounting policies and estimates contained
in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 under the caption
Managements Discussion and Analysis of Financial Condition and Results of Operations Critical
Accounting Policies and Estimates.
30
Effective January 1, 2011, the Company changed the method used to calculate its policy
liabilities for the majority of its health insurance products because it believes that the new
method will be preferable in light of, among other factors, certain changes required by Health Care
Reform Legislation. As a result of this change, the Company recorded the following; (i) a decrease
in the amount of $77.9 million to claims and claims administration liabilities, (ii) an increase in
the amount of $35.1 million to future policy and contract benefits, (iii) an increase in the amount
of $15.0 million to deferred federal income tax liability and (iv) an increase in the amount of
$27.8 million to retained earnings. See Note 2 Change in Accounting Principle in Notes to
Consolidated Condensed Financial Statements.
Regulatory and Legislative Matters
The business of insurance is primarily regulated by the states and is also affected by a range
of legislative developments at the state and federal levels. Recently adopted legislation and
regulations may have a significant impact on the Companys business and future results of
operations. Reference is made to the discussion under the caption
Business Regulatory and
Legislative Matters in the Companys Annual Report on Form 10-K for the year ended December 31,
2010. See Note 11 of Notes to Consolidated Condensed Financial Statements.
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The Company has not experienced significant changes related to its market risk exposures
during the quarter ended March 31, 2011. Reference is made to the information contained in the
Companys Annual Report on Form 10-K for the year ended December 31, 2010 in Item 7A
Quantitative and Qualitative Disclosures about Market Risk.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that
information required to be disclosed in reports that it files or submits under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. In addition, the
disclosure controls and procedures ensure that information required to be disclosed is accumulated
and communicated to management, including the principal executive officer and principal financial
officer, allowing timely decisions regarding required disclosure. Under the supervision and with
the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation,
our principal executive officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by this quarterly
report.
Change in Internal Control over Financial Reporting
There has been no change in the Companys internal control over financial reporting during the
Companys most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
|
|
|
ITEM 1. |
|
LEGAL PROCEEDINGS |
The Company is a party to various material legal proceedings, which are described in Note 11
of Notes to Consolidated Condensed Financial Statements included herein and/or in the Companys
Annual Report on Form 10-K filed for the year ended December 31, 2010 under the caption Item 3.
Legal Proceedings. The Company and its subsidiaries are parties to various other pending legal
proceedings arising in the ordinary course of business, including some asserting significant
damages arising from claims under insurance policies, disputes with agents and other matters. Based
in part upon the opinion of counsel as to the ultimate disposition of such lawsuits and claims,
management believes that the liability, if any, resulting from the disposition of such proceedings,
after consideration of applicable reserves and/or potentially available insurance coverage
benefits, will not be material to the Companys consolidated financial condition or results of
operations. Except as discussed in Note 11 of the Notes to Consolidated Condensed Financial
Statements included herein, during the three month period covered by this Quarterly Report on Form
10-Q, the Company has not been named in any new material legal proceeding, and there have been no
material developments in the previously reported legal proceedings.
31
Reference is made to the risk factors discussed in the Companys Annual Report on Form 10-K
for the year ended December 31, 2010 in Part I, Item 1A. Risk Factors, which could materially
affect the Companys business, financial condition or future results. The risks described in the
Companys Annual Report on Form 10-K, as updated by the Quarterly Reports, are not the only risks
the Company faces. Additional risks and uncertainties not currently known to the Company or that
the Company currently deems to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.
The Company has not experienced material changes to the risk factors disclosed in its Annual
Report on Form 10-K.
|
|
|
ITEM 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the quarter ended March 31, 2011, the Company issued an aggregate of 31,924
unregistered shares of its Class A-1 common stock. In particular, an executive officer of the
Company purchased 7,850 shares of the Companys Class A-1 common stock for aggregate consideration
of $73,000 (or $9.25 per share) and employee participants in the HealthMarkets, Inc. InVest Stock
Ownership Plan purchased 24,074 shares of the Companys Class A-1 common stock for aggregate
consideration of $222,000 (or $9.25 per share). Such sale of securities was made in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended
(and/or Regulation D promulgated thereunder) for transactions by an issuer not involving a public
offering. The proceeds of such sale were used for general corporate purposes.
Issuer Purchases of Equity Securities
The following table sets forth the Companys purchases of HealthMarkets, Inc. Class A-1 common
stock during each of the months in the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Number of Shares |
|
|
|
Shares |
|
|
Average Price |
|
|
Purchased as Part of Publicly |
|
|
That May Yet Be Purchased |
|
Period |
|
Purchased(1) |
|
|
Paid per Share ($) |
|
|
Announced Plans or Programs |
|
|
Under The Plan or Program |
|
|
1/1/11 to 1/31/11 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
2/1/11 to 2/28/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/1/11 to 3/31/11 |
|
|
81,130 |
|
|
|
9.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
81,130 |
|
|
$ |
9.25 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares purchased other than through a publicly announced plan or program includes 81,130 shares purchased from
former or current employees of the Company. |
The following table sets forth the Companys purchases of HealthMarkets, Inc. Class A-2
common stock during each of the months in the three months ended March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
|
|
|
|
Total Number of |
|
|
|
|
|
|
Purchased as Part of |
|
|
Maximum Number of Shares |
|
|
|
Shares |
|
|
Average Price |
|
|
Publicly Announced Plans |
|
|
That May Yet Be Purchased |
|
Period |
|
Purchased(1) |
|
|
Paid per Share ($) |
|
|
or Programs |
|
|
Under The Plan or Program |
|
|
1/1/11 to 1/31/11 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
2/1/11 to 2/28/11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/1/11 to 3/31/11 |
|
|
201,170 |
|
|
|
9.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
201,170 |
|
|
$ |
9.25 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares purchased other than through a publicly announced plan or program includes 201,170 shares purchased from
former or current participants of the stock accumulation plan established for the benefit of the Companys insurance agents. |
|
|
|
ITEM 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
None.
|
|
|
ITEM 5. |
|
OTHER INFORMATION |
None.
32
(a) Exhibits.
|
|
|
|
Exhibit No. |
|
|
Description |
|
|
|
|
18.1 |
|
|
Preferability Letter from Independent Registered Public
Accounting Firm Regarding Change in Accounting Principle |
|
|
|
|
31.1 |
|
|
Rule 13a-14(a)/15d-14(a) Certification, executed by
Kenneth J. Fasola, Chief Executive Officer of
HealthMarkets, Inc. |
|
|
|
|
31.2 |
|
|
Rule 13a-14(a)/15d-14(a) Certification, executed by K.
Alec Mahmood, Senior Vice President and Chief Financial
Officer of HealthMarkets, Inc. |
|
|
|
|
32 |
|
|
Certifications required by Rule 13a-14(b) or Rule
15d-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350), executed by
Kenneth J. Fasola, Chief Executive Officer of
HealthMarkets, Inc. and K. Alec Mahmood, Senior Vice
President and Chief Financial Officer of HealthMarkets,
Inc. |
33
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.
|
|
|
|
|
|
HEALTHMARKETS, INC
(Registrant)
|
|
Date: May 12, 2011 |
/s/ Kenneth J. Fasola
|
|
|
Kenneth J. Fasola |
|
|
Chief Executive Officer |
|
|
|
|
Date: May 12, 2011 |
/s/ K. Alec Mahmood
|
|
|
K. Alec Mahmood |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
34