e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal Year Ended
December 31, 2006.
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
|
|
|
For the transition period
from to
|
Commission file
no. 001-14953
HealthMarkets, Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
(State or other
jurisdiction of
Incorporation or organization)
|
|
75-2044750
(IRS Employer
Identification No.)
|
9151 Boulevard 26
North Richland Hills, Texas
(Address of principal
executive offices)
|
|
76180
(Zip
Code)
|
Registrants telephone number, including area code:
(817) 255-5200
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Class A-2
common stock
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K þ
Indicate by check mark whether the registrant is a large
accelerated filer, accelerated filer, or a non-accelerated filer
(as defined in
Rule 12b-2
of the Act).
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Effective April 5, 2006, all of the registrants
Class A-1
common stock (representing approximately 88.62% of its common
equity at March 10, 2007) is owned by three private
investor groups and members of management. The registrants
Class A-2
common stock is owned by its independent insurance agents and is
subject to transfer restrictions. Neither the
Class-A-1
common stock nor the
Class A-2
common stock is listed or traded on any exchange or market.
Accordingly, as of June 30, 2006, the last business day of
the registrants most recently completed second fiscal
quarter, the aggregate market value of shares of
Class A-1
and
Class A-2
common stock held by non-affiliates was $-0-. As of
March 10, 2007, there were 26,892,160.2016 outstanding
shares of
Class A-1
common stock and 3,454,835.0000 outstanding shares of
Class A-2
common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the annual information statement for the annual
meeting of stockholders are incorporated by reference into
Part III.
PART I
Introduction
HealthMarkets, Inc. and its subsidiaries are collectively
referred to throughout this Annual Report on
Form 10-K
as the Company or
HealthMarkets and may also be referred to as
we, us or our.
We offer insurance (primarily health and life) to niche consumer
and institutional markets. Through our subsidiaries we issue
primarily health insurance policies, covering individuals and
families, to the self-employed, association groups and small
businesses.
HealthMarkets is a holding company, and we conduct our insurance
businesses through our 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). MEGA is an insurance
company domiciled in Oklahoma and is licensed to issue health,
life and annuity insurance policies in all states except New
York. Mid-West is an insurance company domiciled in Texas and is
licensed to issue health, life and annuity insurance policies in
Puerto Rico and all states except Maine, New Hampshire, New
York, and Vermont. Chesapeake is an insurance company domiciled
in Oklahoma and is licensed to issue health and life insurance
policies in all states except New Jersey, New York and Vermont.
Through our Self-Employed Agency Division, we offer a broad
range of health insurance products for self-employed individuals
and individuals who work for small businesses. Our basic
hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include traditional
fee-for-service
indemnity plans and preferred provider organization
(PPO) plans, as well as other supplemental types of
coverage. Commencing in 2006, we began to offer on a selective
state-by-state
basis a new suite of health insurance products to the
self-employed and individual market, including a basic
medical-surgical expense plan, catastrophic expense PPO plans
and catastrophic expense consumer guided health plans.
We market these products to the self-employed and individual
markets through independent contractor agents associated with
UGA-Association Field Services (the principal marketing division
of The MEGA Life and Health Insurance Company) and Cornerstone
America (the principal marketing division of Mid-West National
Life Insurance Company of Tennessee), which are our
dedicated agency sales forces that primarily sell
the Companys products. We believe that we have the largest
direct selling organization in the health insurance field, with
approximately 2,100 independent writing agents per week in the
field selling health insurance to the self employed market in
44 states.
Through our Life Insurance Division, we also issue universal
life, whole life and term life insurance products to individuals
in four markets that we believe are underserved: the
self-employed market, the middle income market, the Hispanic
market and the senior market. We distribute these products
directly to individual customers through our UGA and Cornerstone
agents and other independent agents contracted through two key
unaffiliated marketing companies. These two marketing companies,
in turn, distribute our life products through managing general
agent (MGA) networks.
ZON Re USA LLC (an 82.5%-owned subsidiary) underwrites,
administers and issues accidental death, accidental death and
dismemberment (AD&D), accident medical, and accident
disability insurance products, both on a primary and on a
reinsurance basis. We distribute these products through
professional reinsurance intermediaries and a network of
independent commercial insurance agents, brokers and third party
administrators (TPAs).
On April 5, 2006, we completed a merger (the
Merger) providing for the acquisition of the Company
by affiliates of a group of private equity investors, including
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners (the Private
Equity Investors). See Note B of Notes to
Consolidated Financial Statements. As a result of the Merger,
holders of record on April 5, 2006 of HealthMarkets common
shares (other than shares held by certain members of management
and shares held through HealthMarkets agent stock
accumulation plans) received $37.00 in cash per share. In the
transaction, HealthMarkets public
1
shareholders received aggregate consideration of approximately
$1.6 billion, of which approximately $985.0 million
was contributed as equity by the private equity investors. The
balance of the Merger consideration was financed with the
proceeds of a $500.0 million term loan facility extended by
a group of banks, the proceeds of $100.0 million of trust
preferred securities issued in a private placement, and Company
cash on hand in the amount of approximately $42.8 million.
Our operating segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of
the Companys Self-Employed Agency (SEA) Division, the Life
Insurance Division and Other Insurance, (b) Other Key
Factors, which includes investment income not otherwise
allocated to the Insurance segment, realized gains and losses,
interest expense on corporate debt, general expenses relating to
corporate operations, variable stock compensation and other
unallocated items, and (c) Disposed Operations, which
includes the Companys former Star HRG and former Student
Insurance Division (which operations were sold on July 11,
2006 and December 1, 2006, respectively). See
Note T of Notes to Consolidated Financial Statements
for financial information regarding our segments.
Our principal executive offices are located at 9151
Boulevard 26, North Richland Hills, Texas
76180-5605,
and our telephone number is
(817) 255-5200.
As of March 30, 2007, approximately 88% of our common
equity securities are held by affiliates of three private equity
investors, and as such, we remain subject to the periodic
reporting and other requirements of the Securities Exchange Act
of 1934, as amended. Our periodic SEC filings, including our
annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
Current Reports on
Form 8-K,
and if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through our web
site at www.healthmarkets.com free of charge as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the SEC.
Recent
Developments Sales of Former Student Insurance
Division and Star HRG Division
Our results of operations in 2006 reflected significant gains
realized from the sales of our former Star HRG operations and
Student Insurance Division, completed on July 11, 2006 and
December 1, 2006, respectively. In particular, in 2006 we
recognized pre-tax gains in the amount of approximately
$101.5 million and $100.2 million in connection with
the sale of Star HRG Division and the Student Insurance
Division, respectively.
See Managements Discussion and Analysis of
Financial Condition and Results of Operations and
Note C of Notes to Consolidated Financial Statements for a
further discussion of the terms of the sales of the Star HRG
Division and the Student Insurance Division.
Ratings
Our principal insurance subsidiaries are rated by
A.M. Best, Fitch and Standard & Poors
(S&P). Set forth below are financial strength
ratings of the principal insurance subsidiaries.
|
|
|
|
|
|
|
|
|
A.M. Best
|
|
Fitch
|
|
S&P
|
|
MEGA
|
|
A− (Excellent)
|
|
A− (Strong)
|
|
BBB+ (Good)
|
Mid-West
|
|
A− (Excellent)
|
|
A− (Strong)
|
|
BBB+ (Good)
|
Chesapeake
|
|
A− (Excellent)
|
|
BBB+ (Good)
|
|
BBB (Good)
|
In the table above, the A.M. Bests ratings carry a
negative outlook and the Fitch and S&P ratings
carry a stable outlook.
In evaluating a company, independent rating agencies review such
factors as the companys capital adequacy, profitability,
leverage and liquidity, book of business, quality and estimated
market value of assets, adequacy of policy liabilities,
experience and competency of management, and operating profile.
A.M. Bests ratings currently range from A++
(Superior) to F (Liquidation).
A.M. Bests ratings are based upon factors relevant to
policyholders, agents, insurance brokers and intermediaries and
are not directed to the protection of investors. Fitchs
ratings provide an overall assessment of an insurance
companys financial strength and security, and the ratings
are used to support insurance carrier selection and placement
decisions. Fitchs ratings range from AAA
2
(Exceptionally Strong) to C (Very Weak).
S&Ps financial strength rating is a current opinion of
the financial security characteristics of an insurance
organization with respect to its ability to pay under its
insurance policies and contracts in accordance with their terms.
Standard & Poors financial strength ratings range
from AAA (Extremely Strong) to CC
(Extremely Weak).
A.M. Best has assigned to HealthMarkets, Inc. an issuer
credit rating of bbb− (Good) with a
watch negative outlook. A.M. Bests issuer
credit rating is a current opinion of an obligors ability
to meet its senior obligations. A.M. Bests issuer
credit ratings range from aaa (Exceptional) to
d (In Default).
Fitch has assigned to HealthMarkets, Inc. a long term issuer
default rating of BBB (Good) with a
stable outlook. Fitchs long term issuer
default rating is a current opinion of an obligors ability
to meet all of its most senior financial obligations on a timely
basis over the term of the obligation. Fitchs long term
issuer default ratings range from AAA (Exceptionally
Strong) to D (Default).
Standard & Poors Rating Services has assigned to
HealthMarkets, Inc. a counterparty credit rating of
BB+ (Less Vulnerable) with a stable
outlook. S&Ps counterparty credit rating is a current
opinion of an obligors overall financial capacity to pay
its financial obligations. Standard & Poors
counterparty credit ratings range from AAA
(Extremely Strong) to D (Default).
Insurance
Segment
Self-Employed
Agency Division
Through our Self-Employed Agency Division, we offer a broad
range of health insurance products for the individual and
self-employed market (i.e., self-employed individuals and
individuals who work for small businesses) and products for the
small (2-15 members) employer group market. The Self-Employed
Agency Division generated revenues of $1.462 billion,
$1.526 billion and $1.496 billion, representing 68%,
72% and 72% of our total revenue in 2006, 2005 and 2004,
respectively. We currently have in force approximately 350,000
health insurance policies issued or coinsured by the Company.
We offer a broad range of health insurance products for
self-employed individuals and individuals who work for small
businesses:
Our
Traditional Health Products
Our traditional health insurance plan offerings for the
self-employed market have included the following:
|
|
|
|
|
Our Basic Hospital-Medical Expense Plan has a $1.0 million
lifetime maximum benefit for all injuries and sicknesses and
$500,000 lifetime maximum benefit for each injury or sickness.
Covered expenses are subject to a deductible. Covered hospital
room and board charges are reimbursed at 100% up to a
pre-selected daily maximum. Covered expenses for inpatient
hospital miscellaneous charges,
same-day
surgery facility, surgery, assistant surgeon, anesthesia, second
surgical opinion, doctor visits, and ambulance services are
reimbursed at 80% to 100% up to a scheduled maximum. This type
of health insurance policy is of a scheduled benefit
nature, and, as such, provides benefits equal to the lesser of
the actual cost incurred for covered expenses or the maximum
benefit stated in the policy. These limitations allow for more
certainty in predicting future claims experience, and, as a
result, we expect that future premium increases for this policy
will be lower than future premium increases on our catastrophic
policy.
|
|
|
|
Our Preferred Provider Plan incorporates features of a
preferred provider organization, which are designed
to control healthcare costs through negotiating discounts with a
PPO network. Benefits are structured to encourage the use of
providers with which we have negotiated lower fees for the
services to be provided. The savings from these negotiated fees
reduce the costs to the individual policyholders. The policies
that provide for the use of a PPO impose greater policyholder
cost sharing if the policyholder uses providers outside of the
PPO network.
|
|
|
|
Our Catastrophic Hospital Expense Plan provides a
$2.0 million lifetime maximum for all injuries and
sicknesses and a lifetime maximum benefit for each injury or
sickness ranging from $500,000 to $1.0 million. Covered
expenses are subject to a deductible and are then reimbursed at
a benefit payment rate ranging
|
3
|
|
|
|
|
from 50% to 100% as determined by the policy. After a
pre-selected dollar amount of covered expenses has been reached,
the remaining expenses are reimbursed at 100% for the remainder
of the period of confinement per calendar year. The benefits for
this plan tend to increase as hospital care expenses increase
and, as a result, premiums on these policies are subject to
increase as overall hospital care expenses rise.
|
Each of our traditional health insurance products is available
with a menu of various options (including various
deductible levels, coinsurance percentages and limited riders
that cover particular events such as outpatient accidents, and
doctors visits), enabling the insurance product to be
tailored to meet the insurance needs and the budgetary
constraints of the policyholder. We offer as an optional benefit
the Accumulated Covered Expense (ACE) rider that
provides for catastrophic coverage on our Scheduled/Basic plans
for covered expenses under the contract that generally exceed
$100,000 or, in certain cases, $75,000. The rider pays benefits
at 100% after the stop loss amount is reached, up to the
aggregate maximum amount of the contract for expenses covered by
the rider.
Our
CareOne Product Suite
In the first quarter of 2006, the Company introduced and began
offering its new CareOne product portfolio to the self-employed
and individual market. As CareOne products are approved in
various states, the Company intends over time to replace its
traditional health insurance product offerings with its new
CareOne products.
The new CareOne product portfolio includes a new Basic
Medical/Surgical Expense Plan, two versions of a Catastrophic
Expense PPO Plan and two versions of a Catastrophic Expense
Consumer Guided Health Plan:
|
|
|
|
|
The CareOne Value Plan is a new Basic Medical/Surgical Expense
Plan with a $2.0 million lifetime benefit for all injuries
and sicknesses and $500,000 lifetime maximum benefit for each
injury or sickness. Covered expenses are subject to a deductible
and coinsurance. Covered inpatient and outpatient hospital
charges are reimbursed up to pre-selected per-injury or sickness
maximums. Surgeon, assistant surgeon, anesthesia, second
surgical opinion, and ambulance services are also reimbursed to
a scheduled maximum. Additional benefits are available through
riders and include prescription drugs, emergency services and
wellness care, among others. This type of health insurance
policy is of a scheduled benefit nature, and as
such, provides benefits equal to the lesser of the actual cost
incurred for covered expenses or the maximum benefit stated in
the policy. These limitations allow for more certainty in
predicting future claims experience, and, as a result, we expect
that future premium increases for this policy will be less than
future premium increases on our more comprehensive policies. As
of January 1, 2007, the CareOne Value Plan had been
approved for issuance in 30 states.
|
|
|
|
The CareOne Plan is a new Catastrophic Expense PPO Plan and
provides a $5.0 million lifetime maximum for all injuries
and sicknesses and a maximum benefit for each injury or sickness
of $1.0 million. This plan incorporates features of a
preferred provider organization, which are designed
to control healthcare costs through negotiating provider
discounts with a PPO network. Benefits are structured to
encourage the use of providers with which we have negotiated
lower fees for the services to be provided. This plan imposes
greater policyholder cost sharing if the policyholder uses
providers outside of the PPO network. Covered expenses are
subject to a deductible and are then reimbursed at a benefit
payment rate ranging from 70% to 80% as determined by the
policy. After a pre-selected dollar amount of covered expenses
has been reached, the remaining expenses are reimbursed at 100%
for the remainder of the period of confinement per calendar
year. As a premium and cost savings measure, this new plan
limits payment for diagnostic services
(e.g. X-rays
and laboratory tests) to those diagnostic services that take
place within 21 days of, and are directly related to, a
hospitalization or outpatient surgery. The benefits for this
plan tend to increase as hospital care expenses increase and, as
a result, premiums on these policies are subject to an increase
as overall hospital care expenses rise. As of January 1,
2007, the CareOne Plan had been approved for issuance in
32 states.
|
|
|
|
The CareOne Plus Plan is a second new Catastrophic Expense PPO
Plan and provides a $5.0 million lifetime maximum for all
injuries and sicknesses and a maximum benefit for each injury or
sickness of $1.0 million. This plan also incorporates
features of a preferred provider organization, which
are designed to control healthcare costs through negotiating
provider discounts with a PPO network. Benefits are structured
to encourage the use of providers with which we have negotiated
lower fees for the services to be provided.
|
4
|
|
|
|
|
This plan imposes greater policyholder cost sharing if the
policyholder uses providers outside of the PPO network. Covered
expenses are subject to a deductible and are then reimbursed at
a benefit payment rate ranging from 70% to 80% as determined by
the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed
at 100% for the remainder of the period of confinement per
calendar year. The benefits for this plan tend to increase as
hospital care expenses increase and, as a result, premium on
these policies are subject to an increase as overall hospital
care expenses rise. As of January 1, 2007, the CareOne Plus
Plan had been approved for issuance in 32 states.
|
|
|
|
|
|
The CareOne Select Plan is a new Catastrophic Expense Consumer
Guided Health Plan and provides a $5.0 million lifetime
maximum for all injuries and sicknesses and a maximum benefit
for each injury or sickness of $1.0 million. This plan
incorporates features of a consumer guided health
plan, including information tools available on the internet or
through customer service support via the telephone that provide
customers with access to information about their benefits and
healthcare provider cost and quality. Covered expenses are
subject to a Maximum Allowable Charge
(MAC), which is the maximum fee payable under the
policy for a particular healthcare service. As a premium and
cost savings measure, this new plan limits payment for
diagnostic services (e.g., X-rays and laboratory tests) to those
diagnostic services that take place within 21 days of, and
are directly related to, a hospitalization or outpatient
surgery. The MAC allows for more certainty in predicting future
claims experience, and, as a result, we expect that future
premium increases for this policy will be less than future
premium increases on our catastrophic PPO policies. As of
January 1, 2007, the CareOne Select Plan had been approved
for issuance in 31 states.
|
|
|
|
The CareOne Select Plus Plan is a second new Catastrophic
Expense Consumer Guided Health Plan and provides a
$5.0 million lifetime maximum for all injuries and
sicknesses and a maximum benefit for each injury or sickness of
$1.0 million. This plan also incorporates features of a
consumer guided health plan, including information
tools available on the internet or through customer service
support via the telephone that provide customers with access to
information about their benefits and healthcare provider cost
and quality. Covered expenses are subject to a MAC. The MAC
allows for more certainty in predicting future claims
experience, and, as a result, we expect that future premium
increases for this policy will be less than future premium
increases on our catastrophic PPO policies. As of
January 1, 2007, the CareOne Select Plus Plan had been
approved for issuance in 31 states.
|
These products are issued and sold by our subsidiaries, MEGA and
Mid-West, and are distributed by independent agents associated
with MEGAs UGA Association Field Services and
Mid-Wests Cornerstone America marketing divisions.
Consumer
Guided Health Plan Products
In the first quarter of 2005, we began to offer on a selective
state-by-state
basis a new suite of consumer guided health plans for the
individual market. The Companys consumer guided health
plans incorporate features that enable consumers to assume a
greater role in making healthcare decisions. Information is
published on the internet and is available through customer
support via the telephone to assist our customers in obtaining
access to information about their benefits and healthcare
provider cost and quality. The Companys initial consumer
guided health plan offerings called the
Consumer Preference Plan and the Smart
Consumer Plan were available in various states
during 2005 and 2006, but are no longer available for purchase.
These products were issued and sold by our subsidiary, MEGA, and
were distributed by independent agents associated with
MEGAs UGA-Association Field Services marketing division.
2007 New
Product Introductions
In the second quarter of 2007, we will introduce a new portfolio
of Health Savings Account (HSA) qualified High
Deductible Health Plans (HDHPs) to the self-employed
market. This new product portfolio will include two new
products a PPO-based HSA-qualified product and a
Consumer Guided Health Plan-based HSA-qualified product:
|
|
|
|
|
Our new PPO-based HSA-Qualified HDHPs have a $5.0 million
lifetime maximum benefit for all injuries and sicknesses and a
maximum benefit per year of $1.0 million. This plan
incorporates features of a
|
5
|
|
|
|
|
preferred provider organization, which are designed
to control healthcare costs through negotiating provider
discounts with a PPO network. Benefits are structured to
encourage the use of providers with which we have negotiated
lower fees for the services to be provided. Covered expenses are
subject to a deductible and are then reimbursed at a benefit
payment rate ranging from 70% to 100% as determined by the
policy. After a pre-selected dollar amount of covered expenses
has been reached, the remaining expenses are reimbursed at 100%
for the remainder of the calendar year. As an optional premium
and cost savings measure, this plan can limit payment for
diagnostic services (e.g. X-rays and laboratory tests) to
those diagnostic services that take place within 21 days
of, and are directly related to, a hospitalization or outpatient
surgery. The benefits for this plan tend to increase as hospital
care expenses increase and, as a result, premiums on these
policies are subject to increase as overall hospital care
expenses rise.
|
|
|
|
|
|
Our new Consumer Guided Health Plan-based HSA-Qualified HDHPs
have a $5.0 million lifetime maximum benefit for all
injuries and sicknesses and a maximum benefit per year of
$1.0 million. This plan incorporates features of a
consumer guided health plan, including information
tools available on the internet or through customer service
support via the telephone that provide customers with access to
information about their benefits and healthcare provider cost
and quality. Covered expenses are subject to a MAC, which is the
maximum fee payable under the policy for a particular healthcare
service. Covered expenses are subject to a deductible and are
then reimbursed at a benefit payment rate ranging from 70% to
100% as determined by the policy. After a pre-selected dollar
amount of covered expenses has been reached, the remaining
expenses are reimbursed at 100% for the remainder of the
calendar year. As an optional premium and cost savings measure,
this plan can limit payment for diagnostic services (e.g.
X-rays and laboratory tests) to those diagnostic services that
take place within 21 days of, and are directly related to,
a hospitalization or outpatient surgery. The MAC allows for more
certainty in predicting future claims experience, and, as a
result, we expect that future premium increases for this policy
will be lower than future premium increases on our new PPO-based
HSA-qualified product.
|
Subject to receipt of applicable regulatory approvals, the
Company anticipates that these products will be issued and sold
by our subsidiaries, MEGA and Mid-West, and will be distributed
by independent agents associated with MEGAs
UGA Association Field Services and Mid-Wests
Cornerstone America marketing divisions.
The Company evaluates new product offerings on an ongoing basis.
In the future, we may offer new product lines, including but not
limited to product lines focused on markets not traditionally
served by the Company.
Ancillary
Products
We have also developed and offer new ancillary product lines
that provide protection against short-term disability, as well
as a combination product that provides benefits for life,
disability and critical illness. These products have been
designed to further protect against risks to which our core
customer is typically exposed.
Third
Party Product Initiatives
During 2006, our subsidiaries, MEGA and Mid-West, entered into
agreements to distribute health insurance products underwritten
by other third-party insurance companies. The products sold
under these arrangements focus on markets not traditionally
served by the Company, including seniors and high risk
customers. These products are distributed by independent
insurance agents associated with MEGAs UGA-Association
Field Services and Mid-Wests Cornerstone America marketing
divisions. To date, the Company has generated only nominal
revenues from such arrangements.
Marketing
and Sales
Substantially all of the health insurance products issued by our
insurance company subsidiaries are sold through independent
contractor agents. We believe that we have the largest direct
selling organization in the health insurance field, with
approximately 2,100 independent writing agents per week in the
field selling health insurance to the individual and self
employed market in 44 states.
6
Our agents are independent contractors, and all compensation
that agents receive from us for the sale of insurance is based
upon the agents levels of sales production.
UGA Association Field Services (UGA) and
Cornerstone America (Cornerstone) (the principal
marketing divisions of MEGA and Mid-West, respectively) are each
organized into geographical regions, with each geographical
region having a regional director, two additional levels of
field leaders and writing agents (i.e., the agents that
are not involved in leadership of other agents).
UGA and Cornerstone are each responsible for the recruitment and
training of their field leaders and writing agents. UGA and
Cornerstone generally seek persons with previous sales
experience. The process of recruiting agents is extremely
competitive. We believe that the primary factors in successfully
recruiting and retaining effective agents and field leaders are
our practices regarding advances on commissions, the quality of
the sales leads provided to agents, the availability and
accessibility of equity ownership plans, the quality of the
products offered, proper training, and agent incentives and
support. Classroom and field training with respect to product
content is required and made available to the agents under the
direction of our regulated insurance subsidiaries.
We provide health insurance products to consumers in the
individual and self-employed market in 44 states. As is the
case with many of our competitors in this market, a substantial
portion of our products is issued to members of various
independent membership associations that act as the master
policyholder for such products. The two principal membership
associations in the self-employed market that make available to
their members our health insurance products are the National
Association for the Self-Employed and the Alliance for
Affordable Services. The associations provide their membership
access to a number of benefits and products, including health
insurance underwritten by us. Subject to applicable state law,
individuals generally may not obtain insurance under an
associations master policy unless they are also members of
the association. The agreements with these associations
requiring the associations to continue as the master
policyholder for our policies and to make our products available
to their respective members are terminable by us and the
associations upon not less than one years advance notice
to the other party. While we believe that we are providing
association group coverage in full compliance with applicable
law, changes in our relationship with the membership
associations
and/or
changes in the laws and regulations governing so-called
association group insurance (particularly changes
that would subject the issuance of policies to prior premium
rate approval
and/or
require the issuance of policies on a guaranteed
issue basis) could have a material adverse impact on our
financial condition, results of operations
and/or
business.
UGA agents and Cornerstone agents also act as field service
representatives (FSRs) for the associations. In this
capacity the FSRs enroll new association members and provide
membership retention services. For such services, we and the
FSRs receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of the late
Ronald L. Jensen, the Companys former Chairman) provides
administrative and benefit procurement services to the
associations. One of our subsidiaries, HealthMarkets Lead
Marketing Group Inc. (formerly known as UICI Marketing, Inc.),
serves as our direct marketing group and generates new
membership sales prospect leads for both UGA and Cornerstone for
use by the FSRs (agents). HealthMarkets Lead Marketing Group
also provides video and print services to the associations and
to Specialized Association Services, Inc. See Note O
of Notes to Consolidated Financial Statements. In addition to
health insurance premiums derived from the sale of health
insurance, we receive fee income from the associations,
including fees associated with enrollment and member retention
services, fees for association membership marketing and
administrative services and fees for certain association member
benefits.
HealthMarkets Lead Marketing Group, Inc. generates sales
prospect leads for UGA and Cornerstone for use by their agents.
HealthMarkets Lead Marketing Group administers a call center
(located in Oklahoma City, Oklahoma) staffing approximately 80
tele-service representatives. Leads are also obtained from third
party data sources. HealthMarkets Lead Marketing Group has
developed a marketing pool of approximately fifteen million
prospects from various data sources. Prospects initially
identified by HealthMarkets Lead Marketing Group that are
self-employed, small business owners or individuals may become a
qualified lead by responding through one of
HealthMarkets Lead Marketing Groups lead channels and by
expressing an interest in learning more about health insurance.
We believe that UGA and Cornerstone agents, possessing the
qualified leads contact information, are able to achieve a
higher close rate than is the case with unqualified
prospects.
7
Policy
Design and Claims Management
Our health insurance products are principally designed to limit
coverages to the occurrence of significant events that require
hospitalization. This policy design, which includes high
deductibles, reduces the number of covered claims requiring
processing, thereby serving as a control on administrative
expenses. We seek to price our products in a manner that
accurately reflects our underwriting assumptions and targeted
margins, and we rely on the marketing capabilities of our
dedicated agency sales forces to sell these products at prices
consistent with these objectives.
We maintain administrative centers with full underwriting,
claims management and administrative capabilities. We believe
that by processing our own claims we can better assure that
claims are properly processed and can utilize the claims
information to periodically modify the benefits and coverages
afforded under our policies.
We have also developed an actuarial data warehouse, which is a
critical risk management tool that provides our actuaries with
rapid access to detailed exposure, claim and premium data. This
analysis tool enhances the actuaries ability to design,
monitor and adequately price all of the Self-Employed Agency
Divisions insurance products.
Provider
Network Arrangements and Cost Management Measures
The Company makes available to customers access to selected PPO
provider networks so that customers may obtain discounts on
provider services that would otherwise not be available.
Provider networks are made available on a regional basis, based
on the coverage and discounts available within a particular
geographic region. In situations where a customer does not
obtain services from a contracted provider, the Company applies
various usual and customary fees, which limit the amount paid to
providers within specific geographic areas.
We believe that access to provider network contracts is a
critical factor in controlling medical costs, since there is
often a significant difference between a network-negotiated rate
and the non-discounted rate. To this end, we access networks of
hospitals and physicians through a variety of relationships with
third party network providers. During 2006, approximately 84% of
submitted claims were adjudicated through provider networks. Of
the claims adjudicated through provider networks, approximately
79% were submitted through a primary provider network contract
and approximately 5% were submitted through a
supplemental network utilized if savings are not
achieved through the primary network. In addition, we have
retained a pharmacy benefits management company that has
approximately 61,000 participating pharmacies nationwide. We
also utilize co-payments, coinsurance, deductibles and annual
limits to manage prescription drug costs.
The Company utilizes other means to control medical costs,
including providing customers with access to
supplemental network discounts if savings are not
obtained through a primary provider network contract and use of
pre- and post-payment fee negotiation services and claim editing
services.
Products
for the Small Employer Group Market
In the first quarter of 2005, we began to offer our
Consumer Advantage Plan to small (2-50 members)
employer group consumers in selected urban markets in Texas,
Georgia and Michigan. At January 1, 2007, the Consumer
Advantage Plan had also been approved for issuance in Alabama,
Arizona, Arkansas, Illinois, Missouri, Nevada, Ohio and
Tennessee. These products are issued and sold by our subsidiary,
The MEGA Life and Health Insurance Company, and distributed by
independent agents associated with our UGA
Association Field Services marketing division.
To date, the Company has generated only nominal revenues from
the sale of health insurance products to the small employer
group market.
Life
Insurance Division
Our Life Insurance Division offers life insurance products to
individuals. At December 31, 2006, the Life Insurance
Division (which is based in Oklahoma City, Oklahoma) had nearly
$6.9 billion of net life insurance in force and over
296,000 individual policyholders. The Life Insurance Division
generated revenues of $87.8 million,
8
$83.0 million and $67.6 million (representing 4%, 4%
and 3% of our total revenue) in 2006, 2005 and 2004,
respectively.
Markets
Served
The Life Insurance Division offers its life insurance products
to demographically growing market segments that we have
identified as underserved, including the self-employed market,
the middle-income market, the Hispanic market and the senior
market.
Products
The Life Insurance Divisions products are tailored to meet
the specific needs of customers in each of its targeted markets.
We offer universal life insurance and term life insurance
products to individuals in the self-employed market. We offer
two other universal life insurance products and other term life
insurance products to meet the needs of individuals in the
middle-income and the Hispanic markets. We also offer whole life
insurance products (level, graded and modified) to assist
seniors in meeting their needs to cover final expenses.
Distribution
The Life Insurance Division distributes its insurance products
primarily through internal and external distribution channels.
Commencing in the second quarter of 2002, our UGA and
Cornerstone agents began to market our universal life insurance
and term life insurance products to individuals in the
self-employed market. In 2003, the Life Insurance Division also
entered into new marketing relationships with two independent
marketing companies to distribute our universal life insurance,
term life insurance and whole life insurance products through
networks of managing general agents (MGAs). One marketing
company offers universal life insurance and term life insurance
products to middle-income buyers and through agencies that
specialize in sales to Hispanic buyers. The second marketing
company offers our whole life insurance product line exclusively
for seniors. At year-end 2006, these two marketing organizations
had contracted over 13,000 independent agents to distribute our
products.
Marketing
and Sales
With the help of agents associated with UGA and Cornerstone, the
Life Insurance Division seeks to leverage our significant health
insurance customer base by positioning itself to offer those
customers (self-employed individuals) universal life insurance
and term life insurance products designed to fit their changing
needs. The two independent marketing companies that we have
contracted with offer universal life insurance and term life
insurance product lines through their agents to cover the needs
of the middle-income market, the Hispanic market and the senior
market. The Life Insurance Division has also developed a needs
analysis software selling system, Blueprint for
Life®.
This selling tool allows the agent to accurately and quickly
identify the amount of insurance that should be carried by an
individual. We believe that the Blueprint for
Life®
provides a much needed and valuable service to the middle-income
buyer, who has often been overlooked or underserved by other
distributors of life insurance products.
Other
Insurance
Through our 82.5%-owned subsidiary, ZON Re USA LLC (ZON
Re), we underwrite, administer and issue accidental death,
accidental death and dismemberment (AD&D), accident medical
and accident disability insurance products, both on a primary
and on a reinsurance basis. In the year ended December 31,
2006, ZON Re generated revenues of $35.3 million and
operating income of $5.5 million.
ZON Re underwrites and manages a portfolio of personal accident
reinsurance programs on behalf of MEGA for primary life,
accident and health and property and casualty insurers that wish
to transfer risks associated with certain types of primary
personal accident insurance programs. Accident reinsurance
provides reimbursement to primary insurance carriers for covered
losses resulting from accidental bodily injury or accidental
death. For its reinsurance clients, ZON Re targets national,
regional and middle market insurers in the United States and
Canada. ZON Re distributes accident reinsurance products through
a network of professional reinsurance intermediaries. ZON Re
underwrites both treaty and facultative accident reinsurance
programs, which may be offered on either a
9
quota share or excess of loss basis. The Company has determined,
as a matter of policy, that MEGAs exposure on any single
reinsurance contract issued by it and underwritten by ZON Re
will not exceed $1.0 million per person and
$10.0 million per event.
ZON Re also underwrites and distributes a limited portfolio of
primary accident insurance products issued by Chesapeake. These
products are designed for direct purchase by banks,
associations, employers and affinity groups and are distributed
through a national network of independent commercial insurance
agents, brokers and third party administrators (TPAs). The
Company has determined, as a matter of policy, that
Chesapeakes maximum exposure on any single primary
insurance contract issued by it and underwritten by ZON Re will
not exceed $1.0 million per person.
Ceded
Reinsurance
Our insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance
companies on both an
excess-of-loss
and coinsurance basis. The maximum retention by us on one
individual in the case of life insurance is $200,000 for MEGA,
Mid-West and Chesapeake. We use reinsurance for our health
insurance business solely for limited purposes. Reinsurance
agreements are intended to limit an insurers maximum loss.
Competition
In each of our lines of business, we compete with other
insurance companies or service providers, depending on the line
and product, although we have no single competitor who competes
against us in all of the business lines in which we operate.
With respect to the business of our Self-Employed Agency
Division, the market is characterized by many competitors, and
our main competitors include health insurance companies, health
maintenance organizations and the Blue Cross/Blue Shield plans
in the states in which we write business. While we are among the
largest competitors in terms of market share in some of our
business lines, in some cases there are one or more major market
players in a particular line of business.
Competition in our businesses is based on many factors,
including quality of service, product features, price, scope of
distribution, scale, financial strength ratings and name
recognition. We compete, and will continue to compete, for
customers and distributors with many insurance companies and
other financial services companies. We compete not only for
business and individual customers, employer and other group
customers, but also for agents and distribution relationships.
Some of our competitors may offer a broader array of products
than our specific subsidiaries with which they compete in
particular markets, may have a greater diversity of distribution
resources, may have better brand recognition, may from time to
time have more competitive pricing, may have lower cost
structures or, with respect to insurers, may have higher
financial strength or claims paying ratings. Organizations with
sizable market share or provider-owned plans may be able to
obtain favorable financial arrangements from healthcare
providers that are not available to us. Some may also have
greater financial resources with which to compete. In addition,
from time to time, companies enter and exit the markets in which
we operate, thereby increasing competition at times when there
are new entrants. For example, several large insurance companies
have recently entered the market for individual health insurance
products
and/or
consumer guided health plans. We may lose business to
competitors offering competitive products at lower prices, or
for other reasons, which could materially adversely affect our
future results of operations and financial condition.
Regulatory
and Legislative Matters
Insurance
Regulation
State
Regulation General
Our insurance subsidiaries are subject to extensive regulation
in their states of domicile and the other states in which they
do business under statutes that typically delegate broad
regulatory, supervisory and administrative powers to insurance
departments. The method of regulation varies, but the subject
matter of such regulation covers, among other things, the amount
of dividends and other distributions that can be paid by the
insurance subsidiaries without prior approval or notification;
the granting and revoking of licenses to transact business;
trade practices,
10
including with respect to the protection of consumers;
disclosure requirements; privacy standards; minimum loss ratios;
premium rate regulation; underwriting standards; approval of
policy forms; claims payment; licensing of insurance agents and
the regulation of their conduct; the amount and type of
investments that the insurance subsidiaries may hold, minimum
reserve and surplus requirements; risk-based capital
requirements; and compelled participation in, and assessments in
connection with, risk sharing pools and guaranty funds. Such
regulation is intended to protect policyholders rather than
investors.
State regulation of health insurance products varies from state
to state, although all states regulate premium rates, policy
forms and underwriting and claims practices to one degree or
another. Most states have special rules for health insurance
sold to individuals and small groups. For example, a number of
states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for
healthcare coverage between new business and renewal business
for small groups with similar demographics. Every state has also
adopted legislation that would make health insurance available
to all small employer groups by requiring coverage of all
employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to
offer a basic plan exempt from certain benefits as well as a
standard plan, or by establishing a mechanism to spread the risk
of high risk employees to all small group insurers.
Various states have from time to time proposed
and/or
enacted changes to the healthcare system that could affect the
relationship between health insurers and their customers. For
example, on April 12, 2006, Massachusetts enacted
healthcare reform legislation intended to provide healthcare
coverage to previously uninsured residents of Massachusetts.
Effective July 1, 2007, the law requires all residents to
obtain minimum levels of health insurance and requires employers
with 11 or more full time employees to pay an assessment if they
do not offer health insurance to these employees. The law also
establishes the Commonwealth Health Insurance
Connector (Connector), through which individuals and small
businesses may obtain health insurance directly from the
Connector. Our insurance subsidiaries, MEGA and Mid-West,
submitted bids to sell products through the Connector, but were
not among the companies selected to participate in the
Connector. We intend to continue selling health insurance in
Massachusetts outside the Connector. In addition, various other
states are considering the adoption of play or pay
laws requiring that employers either offer health insurance or
pay a tax to cover the costs of public healthcare insurance. We
cannot predict with certainty the effect that the Massachusetts
law, or proposed legislation in other states, if adopted, could
have on our insurance businesses and operations.
A number of states have enacted other new health insurance
legislation over the past several years. These laws, among other
things, mandate benefits with respect to certain diseases or
medical procedures, require health insurers to offer an
independent external review of certain coverage decisions and
establish health insurer liability. There has also been an
increase in legislation regarding, among other things, prompt
payment of claims, privacy of personal health information,
health insurer liability, prohibition against insurers including
discretionary clauses in their policy forms and relationships
between health insurers and providers. We expect that this trend
of increased legislation will continue. These laws may have the
effect of increasing our costs and expenses.
We provide health insurance products to consumers in the
individual and self-employed market in 44 states. As is the
case with many of our competitors in this market, a substantial
portion of our products is issued to members of various
independent membership associations that act as the master
policyholder for such products. During 2004, we, and our
insurance company subsidiaries, resolved a nationwide class
action lawsuit challenging the nature of the relationship
between our insurance companies and the membership associations
that make available to their members our insurance
companies health insurance products. A number of
additional lawsuits challenging the nature of the relationship
between our insurance companies and such membership associations
are ongoing. See Note P of Notes to Consolidated
Financial Statements. While we believe that we are providing
association group coverage in full compliance with applicable
law, changes in our relationship with the membership
associations
and/or
changes in the laws and regulations governing association group
insurance (particularly changes that would subject the issuance
of policies to prior premium rate approval
and/or
require the issuance of policies on a guaranteed
issue basis) could have a material adverse impact on our
financial condition, results of operations
and/or
business.
Many states have also enacted insurance holding company laws
that require registration and periodic reporting by insurance
companies controlled by other corporations. Such laws vary from
state to state, but typically require
11
periodic disclosure concerning the corporation that controls the
controlled insurer and prior notice to, or approval by, the
applicable regulator of inter-corporate transfers of assets and
other transactions (including payments of dividends in excess of
specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval
for the acquisition of a significant ownership interest (i.e.,
10% or more) in the insurance holding company. HealthMarkets
(the holding company) and our insurance subsidiaries are subject
to such laws, and we believe that we and such subsidiaries are
in compliance in all material respects with all applicable
insurance holding company laws and regulations.
Under the risk-based capital initiatives adopted in 1992 by the
National Association of Insurance Commissioners
(NAIC), insurance companies must calculate and
report information under a risk-based capital formula.
Risk-based capital formulas are intended to evaluate risks
associated with asset quality, adverse insurance experience,
losses from asset and liability mismatching, and general
business hazards. This information is intended to permit
regulators to identify and require remedial action for
inadequately capitalized insurance companies, but it is not
designed to rank adequately capitalized companies. At
December 31, 2006, the risk-based capital ratio of each of
our domestic insurance subsidiaries significantly exceeded the
ratio for which regulatory corrective action would be required.
The states in which our insurance subsidiaries are licensed have
the authority to change the minimum mandated statutory loss
ratios to which they are subject, the manner in which these
ratios are computed and the manner in which compliance with
these ratios is measured and enforced. Loss ratios are commonly
defined as incurred claims as a percentage of earned premiums.
Most states in which our insurance subsidiaries write insurance
have adopted the minimum loss ratios recommended by the NAIC,
but frequently the loss ratio regulations do not apply to the
types of health insurance issued by our subsidiaries. A number
of states are considering the adoption of, or have adopted, laws
that would mandate minimum statutory loss ratios, or increase
existing minimum statutory loss ratios, for the products we
offer. For example, on July 1, 2007, California regulations
will become effective that will require a minimum medical loss
ratio of 70% for health insurance issued after that date, as
well as business issued prior to that date if it is subject to a
rate revision. We are unable to predict the impact of
(i) any changes in the mandatory statutory loss ratios for
individual or group policies to which we may become subject, or
(ii) any change in the manner in which these minimums are
computed or enforced in the future. Such changes could result in
a narrowing of profit margins and adversely affect our business
and results of operations. We have not been informed by any
state that our insurance subsidiaries do not meet mandated
minimum ratios, and we believe that we are in compliance with
all such minimum ratios. We have filed new products intended to
address the California minimum medical loss ratio requirements
that will become effective on July 1, 2007. Our ability to
offer these products is subject to receipt of applicable
regulatory approvals, and there can be no assurance that
approvals will be received. In the event that we are not in
compliance with minimum statutory loss ratios mandated by
regulatory authorities with respect to certain policies, we may
be required to reduce or refund premiums, which could have a
material adverse effect upon our business and results of
operations.
The NAIC and state insurance departments are continually
reexamining existing laws and regulations, including those
related to reducing the risk of insolvency and related
accreditation standards. To date, the increase in
solvency-related oversight has not had a significant impact on
our insurance business.
State
Regulation Financial and Market Conduct
Examinations
Our insurance subsidiaries are required to file detailed annual
statements with the state insurance regulatory departments and
are subject to periodic financial and market conduct
examinations by such departments. The most recently completed
financial examination of MEGA in Oklahoma (MEGAs domicile
state) was completed as of and for the two-year period ended
December 31, 2003. The most recently completed financial
examination of Mid-West in Tennessee (Mid-Wests state of
domicile until October 2005) was completed as of and for
the three-year period ended December 31, 2003. The most
recently completed financial examination of Chesapeake in
Oklahoma (Chesapeakes domicile state) was completed as of
and for the three-year period ended December 31, 2003. In
the first quarter of 2007, the Oklahoma Department of Insurance
commenced financial examinations of MEGA and Chesapeake for the
three-year period ended December 31, 2006 and the Texas
Department of Insurance (Mid-Wests state of domicile since
October 2005) commenced a financial examination of Mid-West
for the three-year period ended December 31, 2006. The
examinations are ongoing.
12
State insurance departments have also periodically conducted and
continue to conduct market conduct examinations of
HealthMarkets insurance subsidiaries. In March 2005,
HealthMarkets received notification that the Market Analysis
Working Group of the National Association of Insurance
Commissioners had chosen the states of Washington and Alaska to
lead a multi-state market conduct examination of
HealthMarkets principal insurance subsidiaries. We believe
that approximately 34 states have elected to participate in
the examination, which commenced in May 2005 and is ongoing. The
examiners have completed the onsite phases of the examination.
An exit interview was held on July 17, 2006, in which
representatives of the lead states and the Company participated.
The Company expects to receive a draft of the examination report
in the near future and will respond to the draft report in a
timely manner. While we do not currently believe that the
multi-state market conduct examination will have a material
adverse effect upon our consolidated financial position or
results of operations, state insurance regulatory agencies have
authority to levy monetary fines and penalties resulting from
findings made during the course of such examinations.
In addition to the multi-state market conduct examination, as of
December 31, 2006, MEGA, Mid-West
and/or
Chesapeake were subject to ongoing market conduct examinations
and/or open
inquiries with respect to marketing practices in 8 states.
State insurance regulatory agencies have authority to levy
monetary fines and penalties resulting from findings made during
the course of such market conduct examinations. Historically,
our insurance subsidiaries have from time to time been subject
to such fines and penalties, none of which individually or in
the aggregate have had a material adverse effect on our results
of operations or financial condition.
On December 6, 2006, MEGA, Mid-West and Chesapeake, entered
into a settlement agreement with the Massachusetts Division of
Insurance (MA DOI) upon the conclusion of a market conduct
examination by the MA DOI covering the period January 1,
2002 to December 31, 2004. The examination consisted of a
review of the operations of MEGA, Mid-West and Chesapeake for
small group health insurance issued to Massachusetts certificate
holders during the examination period. The settlement agreement
provides, among other things, for changes in certain Company
operations and procedures, including those related to claims
handling, complaints and grievances, marketing and sales and
underwriting. In addition, MEGA, Mid-West and Chesapeake agreed
to conduct a claims reassessment process, pursuant to which the
companies are contacting Massachusetts claimants and offering to
reassess certain denied claims based on specific codes
identified by the MA DOI. The reassessment covers claims for the
period January 1, 2002 through December 31, 2004, as
well as claims on certificates issued through April 30,
2005 or renewed through July 31, 2005 to the date of their
first renewal or lapse. The MA DOI will not impose fines or take
other action against the Company unless the Company fails to
complete the required actions set forth in the settlement
agreement or unless additional material information related to
the required actions becomes available to the MA DOI. In
entering the settlement, the Company did not admit, deny or
concede any actual or potential fault, wrongdoing, liability or
violation of law. The Company believes that the terms of the
settlement will not have a material adverse effect upon the
financial condition or results of operations of the Company.
Federal
Regulation
In 1945, the U.S. Congress enacted the McCarran-Ferguson
Act, which declared the regulation of insurance to be primarily
the responsibility of the individual states. Although repeal of
McCarran-Ferguson is debated in the U.S. Congress from time
to time, the federal government generally does not directly
regulate the insurance business. However, federal legislation
and administrative policies in several areas, including
healthcare, pension regulation, age and sex discrimination,
financial services regulation, securities regulation, privacy
laws, terrorism and federal taxation, do affect the insurance
business.
The
Health Insurance Portability and Accountability Act of 1996
(HIPAA)
As with other lines of insurance, the regulation of health
insurance historically has been within the domain of the states.
However, HIPAA and the implementing regulations promulgated
thereunder by the Department of Health and Human Services impose
obligations for issuers of health and dental insurance coverage
and health and dental benefit plan sponsors. HIPAA requires
certain guaranteed issuance and renewability of health insurance
coverage for individuals and small employer groups (generally 50
or fewer employees) and limits exclusions based on pre-existing
conditions. Most of the insurance reform provisions of HIPAA
became effective for plan years beginning on or after
July 1, 1997.
13
HIPAA also establishes requirements for maintaining the
confidentiality and security of individually identifiable health
information and new standards for electronic healthcare
transactions. The Department of Health and Human Services
promulgated final HIPAA regulations in 2002. The privacy
regulations required compliance by April 2003, the electronic
transactions regulations by October 2003, and the security
regulations by April 2005. As have other entities in the
healthcare industry, we have incurred substantial costs in
meeting the requirements of these HIPAA regulations and expect
to continue to incur costs to maintain compliance. We have
worked diligently to comply with these regulations within the
time periods required and believe that we have complied.
HIPAA is a far-reaching and complex issue and proper
interpretation and practice under the law continue to evolve.
Consequently, our efforts to measure, monitor and adjust our
business practices to comply with HIPAA are ongoing. Failure to
comply could result in regulatory fines and civil lawsuits.
Knowing and intentional violations of these rules may also
result in federal criminal penalties.
HealthMarkets is continuously reviewing the potential impact of
the HIPAA privacy and security regulations on its operations,
including its information technology and security systems. There
can be no assurance that the restrictions and duties imposed by
the final rules on the privacy and security of
individually-identifiable health information will not have a
material adverse effect on HealthMarkets business and
future results of operations.
USA
PATRIOT Act
On October 26, 2001, the International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001 was enacted
into law as part of the USA PATRIOT Act. The law requires, among
other things, that financial institutions adopt anti-money
laundering programs that include policies, procedures and
controls to detect and prevent money laundering, designate a
compliance officer to oversee the program and provide for
employee training, and periodic audits in accordance with
regulations proposed by the U.S. Treasury Department.
Treasury regulations governing portions of our life insurance
business require that we maintain procedures designed to detect
and prevent money laundering and terrorist financing. We remain
subject to U.S. regulations that prohibit business dealings
with entities identified as threats to national security. We
have licensed software to enable us to detect and prevent such
activities in compliance with existing regulations and we are
developing policies and procedures designed to comply with the
proposed regulations should they come into effect.
There are significant criminal and civil penalties that can be
imposed for violation of Treasury regulations. We believe that
the steps we are taking to comply with the current regulations
and to prepare for compliance with the proposed regulations
should be sufficient to minimize the risks of such penalties.
CAN
SPAM Act
From time to time the Company utilizes, either directly or
through third party vendors,
e-mail to
identify prospective sales leads for use by its agents. The
federal CAN SPAM Act, which became effective January 1,
2004 and is administered and enforced by the Federal Trade
Commission, establishes national standards for sending bulk,
unsolicited commercial
e-mail.
While targeting and prohibiting
e-marketers
to send unsolicited commercial
e-mail with
falsified headers, the CAN SPAM Act permits the use of
unsolicited commercial
e-mail if
and as long as the message contains an opt-out mechanism, a
functioning return
e-mail
address, a valid subject line indicating the
e-mail is an
advertisement and the legitimate physical address of the mailer.
While the Company has taken what it believes are reasonable
steps to ensure that it, and the various third party vendors
with which it does business, are in full compliance with the CAN
SPAM Act, failure to comply with the provisions of the CAN SPAM
Act could result in regulatory fines and civil lawsuits.
Gramm-Leach-Bliley
Act
The Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or GLBA) includes several
privacy provisions and introduced new controls over the transfer
and use of individuals nonpublic personal data by
financial institutions, including insurance companies, insurance
agents and brokers and certain other entities licensed by state
insurance regulatory authorities.
GLBA provides that there is no federal preemption of a
states insurance related privacy laws if the state law is
more stringent than the privacy rules imposed under GLBA.
Accordingly, selected state insurance regulators or state
14
legislatures have adopted rules that limit the ability of
insurance companies, insurance agents and brokers and certain
other entities licensed by state insurance regulatory
authorities to disclose and use non-public information about
consumers to third parties. These limitations require the
disclosure by these entities of their privacy policies to
consumers and, in some circumstances, will allow consumers to
prevent the disclosure or use of certain personal information to
an unaffiliated third party. Pursuant to the authority granted
under GLBA to state insurance regulatory authorities to regulate
the privacy of nonpublic personal information provided to
consumers and customers of insurance companies, insurance agents
and brokers and certain other entities licensed by state
insurance regulatory authorities, the National Association of
Insurance Commissioners has promulgated a model regulation
called Privacy of Consumer Financial and Health Information
Regulation. Some states issued this model regulation before
July 1, 2001, while other states must pass certain
legislative reforms to implement new state privacy rules
pursuant to GLBA. In addition, GLBA requires state insurance
regulators to establish standards for administrative, technical
and physical safeguards pertaining to customer records and
information to (a) ensure their security and
confidentiality, (b) protect against anticipated threats
and hazards to their security and integrity, and
(c) protect against unauthorized access to and use of these
records and information. The privacy and security provisions of
GLBA have significantly affected how a consumers nonpublic
personal information is transmitted through and used by
diversified financial services companies and conveyed to and
used by outside vendors and other unaffiliated third parties.
Employee
Retirement Income Security Act of 1974
The Employee Retirement Income Security Act of 1974, as amended
(ERISA), regulates how goods and services are provided to or
through certain types of employer-sponsored health benefit
plans. ERISA is a set of laws and regulations subject to
periodic interpretation by the United Stated Department of Labor
(DOL) as well as the federal courts. ERISA places controls on
how our insurance subsidiaries may do business with employers
who sponsor employee health benefit plans. We believe that many
of our products are not subject to ERISA because they are
offered to and used by individuals, self-employed persons or
employers with less than two participants who are employees as
of the start of any plan year. However, some of our products or
services may be subject to the ERISA regulations. During 2005
and 2006, we received inquiries from the Boston and Dallas
offices of the DOL that alleged, among other things, that
certain policy forms in use by our insurance subsidiaries are
not ERISA compliant. See Note P of Notes to
Consolidated Financial Statements. The Company disputes many of
these allegations and has presented a plan to the DOL to resolve
this matter. We believe that resolution of this matter will not
have a material adverse effect on the Companys financial
condition or results of operations.
Legislative
Developments
Legislation has been introduced in the U.S. Congress that
would allow state-chartered and regulated insurance companies,
such as our insurance subsidiaries, to choose instead to be
regulated exclusively by a federal insurance regulator. We do
not believe that such legislation will be enacted during the
current Congressional term.
Numerous proposals to reform the current healthcare system have
been introduced in the U.S. Congress and in various state
legislatures. Proposals have included, among other things,
modifications to the existing employer-based insurance system, a
quasi-regulated system of managed competition
among health insurers, and a single-payer, public program.
Changes in healthcare policy could significantly affect our
business. For example, federally mandated, comprehensive major
medical insurance, if proposed and implemented, could partially
or fully replace some of our current products. Furthermore,
legislation has been introduced from time to time in the
U.S. Congress that could result in the federal government
assuming a more direct role in regulating insurance companies.
There is also legislation pending in the U.S. Congress and
in various states designed to provide additional privacy
protections to consumer customers of financial institutions.
These statutes and similar legislation and regulations in the
United States or other jurisdictions could affect our ability to
market our products or otherwise limit the nature or scope of
our insurance operations.
The NAIC and individual states have been studying small face
amount life insurance in recent years. Some initiatives that
have been raised at the NAIC include further disclosure for
small face amount policies and restrictions on premium to
benefit ratios. The NAIC is also studying other issues such as
suitability of insurance products for certain
customers. This may have an effect on our pre-funded funeral
insurance business. Suitability
15
requirements such as a customer assets and needs worksheet could
extend and complicate the sale of pre-funded funeral insurance
products.
We are unable to evaluate new legislation that may be proposed
and when or whether any such legislation will be enacted and
implemented. However, many of the proposals, if adopted, could
have a material adverse effect on our financial condition, cash
flows or results of operations, while others, if adopted, could
potentially benefit our business.
Employees
We had approximately 1,800 employees at December 31, 2006.
We consider our employee relations to be good. Agents associated
with MEGAs UGA and Mid-Wests Cornerstone field
forces are independent contractors and are not employees of the
Company.
Executive
Officers of the Company
The Chairman of the Company is elected, and all other executive
officers listed below are appointed, by the Board of Directors
of the Company at its Annual Meeting each year or by the
Executive Committee of the Board of Directors to hold office
until the next Annual Meeting or until their successors are
elected or appointed. None of these officers have family
relationships with any other executive officer or director.
|
|
|
|
|
|
|
|
|
Name of Officer
|
|
Principal Position
|
|
Age
|
|
|
Business Experience During Past Five Years
|
|
William J. Gedwed
|
|
Director,
President and
Chief Executive
Officer
|
|
|
51
|
|
|
Mr. Gedwed has served as a
director of the Company since June 2000 and as the President and
Chief Executive Officer of the Company since July 1, 2003.
He was named Chairman of the Board in September 2005 and served
in such position until April 2006. He has served as a Director
and/or
executive officer of NMC Holdings, Inc.
and/or its
subsidiaries since August 1993. Mr. Gedwed currently serves
as Chairman and Director of the Companys insurance
subsidiaries.
|
Troy A. McQuagge
|
|
President of the
Companys
Agency
Marketing Group
|
|
|
45
|
|
|
Mr. McQuagge served as President
of UGA Association Field Services from 1997 until
May 2004. Mr. McQuagge was named as President of the
Companys Agency Marketing Group in November 2004.
Mr. McQuagge has served as Senior Vice President of the
Companys insurance subsidiaries since June 2004.
|
Michael E. Boxer
|
|
Executive Vice
President and
Chief Financial
Officer
|
|
|
45
|
|
|
Mr. Boxer joined the Company in
September 2006 as Executive Vice President and Chief Financial
Officer. He also serves as a Director, Executive Vice President
and Chief Financial Officer of the Companys insurance
subsidiaries. Prior to joining the Company, Mr. Boxer
served as President of The Enterprise Group Ltd., a health care
financial advisory firm. Mr. Boxer served as Executive Vice
President and Chief Financial Officer of Mariner Health Care,
Inc., a skilled nursing company, from 2003 until its sale in
2004. Prior to Mariner, Mr. Boxer was Senior Vice President
and Chief Financial Officer at Watson Pharmaceuticals, Inc.
|
16
|
|
|
|
|
|
|
|
|
Name of Officer
|
|
Principal Position
|
|
Age
|
|
|
Business Experience During Past Five Years
|
|
Michael A. Colliflower
|
|
Executive Vice
President and
General Counsel
|
|
|
52
|
|
|
Mr. Colliflower was named as
Executive Vice President and General Counsel effective
August 30, 2006. He also served as the Companys Chief
Compliance Officer until March 14, 2007.
Mr. Colliflower joined HealthMarkets in July 2005 as Senior
Vice President and General Counsel-Insurance Operations. He
currently serves as a Director, Executive Vice President and
General Counsel of the Companys insurance subsidiaries.
Prior to joining the Company, Mr. Colliflower served from
October 2002 as Senior Vice President and Chief Insurance
Counsel for the insurance subsidiaries of Universal American
Financial Corp. From August 1996 until March 2002,
Mr. Colliflower held various management positions at the
Conseco Companies, including Senior Vice President
Legal and Chief Compliance Officer.
|
Phillip J. Myhra
|
|
Executive Vice
President
Insurance Group
|
|
|
53
|
|
|
Mr. Myhra has served as an
executive officer of the Insurance Group since December 1999 and
as Executive Vice President Insurance Group of the
Company since February 2001. He serves as a Director, President
and Chief Executive Officer of the Companys insurance
subsidiaries. Prior to joining the Company, Mr. Myhra
served as Senior Vice President of Mutual of Omaha.
|
James N. Plato
|
|
President Life
Insurance
Division
|
|
|
58
|
|
|
Mr. Plato was appointed President
of the Life Insurance Division and has served as a Director and
executive officer of the Companys insurance subsidiaries
since June 2001. From 2000 to 2001, Mr. Plato served as an
executive officer
and/or
Director of Ilona Financial Group and its subsidiaries.
|
Asher M. Schoor
|
|
Senior Vice
President
|
|
|
35
|
|
|
Mr. Schoor has served as a Senior
Vice President since May 2006. Prior to joining the Company,
Mr. Schoor was a consultant at McKinsey & Company,
where he worked from 2001 until 2006.
|
Nancy G. Cocozza
|
|
Executive Vice
President
|
|
|
46
|
|
|
Ms. Cocozza joined the Company on
March 30, 2007 as Executive Vice President. Prior to
joining the Company, Ms. Cocozza served as Senior Vice
President Government Programs for Coventry Health
Care from May 2001 until October 2006.
|
The following factors could impact the Companys business
and financial prospects:
|
|
|
HealthMarkets
may lose business to competitors offering competitive products
at lower prices.
|
We compete, and will continue to compete, for customers and
distributors with many insurance companies and other financial
services companies. We compete not only for business and
individual customers, employer and other group customers, but
also for agents and distribution relationships. Our competitors
may offer a broader array of products than we do, have a greater
diversity of distribution resources, have better brand
recognition, have more competitive pricing or, have higher
financial strength or claims paying ratings. Competitors with
sizable market share or provider-owned plans may be able to
obtain favorable financial arrangements from healthcare
providers that are not available to us.
17
|
|
|
Failure
to accurately estimate medical claims and healthcare costs may
have a significant impact on the Companys business and
results of operation.
|
If we are unable to accurately estimate medical claims and
control healthcare costs, our results of operations may be
materially and adversely affected. We estimate the cost of
future medical claims and other expenses using actuarial methods
based upon historical data, medical inflation, product mix,
seasonality, utilization of healthcare services and other
relevant factors. We establish premiums based on these methods.
The premiums we charge our customers generally are fixed for
one-year periods, and costs we incur in excess of our medical
claim projections generally are not recovered in the contract
year through higher premiums.
|
|
|
Failure
of our insurance subsidiaries to maintain their current
insurance ratings could materially adversely affect
HealthMarkets business and results of
operations.
|
Our principal insurance subsidiaries are currently rated by
A.M. Best Company, Fitch and Standard &
Poors. If our insurance subsidiaries are not able to
maintain their current rating by A.M. Best Company, Fitch
and/or
Standard & Poors, our results of operations could
be materially adversely affected. Decreases in operating
performance and other financial measures may result in a
downward adjustment of the rating of our insurance subsidiaries
assigned by A.M. Best Company, Fitch or Standard &
Poors. Other factors beyond our control, such as general
downward economic cycles and changes implemented by the rating
agencies, including changes in the criteria for the underwriting
or the capital adequacy model, may also result in a decrease in
the rating. A downward adjustment in rating by A.M. Best
Company, Fitch
and/or
Standard & Poors of our insurance subsidiaries
could have a material adverse effect on our business and results
of operations.
|
|
|
Changes
in our relationship with membership associations that make
available to their members our health insurance products
and/or
changes in the laws and regulations governing so-called
association group insurance could materially
adversely affect HealthMarkets business and results of
operations.
|
As is the case with many of our competitors in the self-employed
market, a substantial portion of our health insurance products
is issued to members of various independent membership
associations that act as the master policyholder for such
products. The two principal membership associations in the
self-employed market that make available to their members our
health insurance products are the National Association for the
Self-Employed and the Alliance for Affordable Services. The
associations provide their members access to a number of
benefits and products, including health insurance underwritten
by us. Subject to applicable state law, individuals generally
may not obtain insurance under an associations master
policy unless they are also members of the association. The
agreements with these associations requiring the associations to
continue as the master policyholder for our policies and to make
our products available to their respective members are
terminable by us or the association upon not less than one
years advance notice to the other party.
MEGAs UGA agents and Mid-Wests Cornerstone America
agents also act as field service representatives (FSRs) for the
associations. In this capacity, the FSRs enroll new association
members and provide membership retention services. For such
services, we and the FSRs receive compensation. Specialized
Association Services, Inc. (a company controlled by the adult
children of the late Ronald L. Jensen (the Companys former
Chairman)) provides administrative and benefit procurement
services to the associations. One of our subsidiaries,
HealthMarkets Lead Marketing Group, Inc. (formerly known as UICI
Marketing, Inc.), serves as our direct marketing group and
generates new membership sales prospect leads for both UGA and
Cornerstone for use by the FSRs. HealthMarkets Lead Marketing
Group also provides video and print services to the associations
and to Specialized Association Services, Inc. In addition to
health insurance premiums derived from the sale of health
insurance, we receive fee income from the associations,
including fees associated with enrollment and member retention
services, fees for association membership marketing and
administrative services and fees for certain association member
benefits.
While we believe that we are providing association group
coverage in full compliance with applicable law, changes in our
relationship with the membership associations
and/or
changes in the laws and regulations governing so-called
association group insurance, particularly changes
that would subject the issuance of policies to prior premium
rate approval
and/or
require the issuance of policies on a guaranteed
issue basis, could have a material adverse impact on our
financial condition, results of operations
and/or
business.
18
|
|
|
Our
domestic insurance subsidiaries are currently the subject of a
multi-state market conduct examination, and an adverse finding
or outcome from that examination could adversely affect our
results of operations and financial condition.
|
In March 2005, HealthMarkets received notification that the
Market Analysis Working Group of the National Association of
Insurance Commissioners had chosen the states of Washington and
Alaska to lead a multi-state market conduct examination of
HealthMarkets principal insurance subsidiaries, The MEGA
Life and Health Insurance Company, Mid-West National Life
Insurance Company of Tennessee and The Chesapeake Life Insurance
Company. That examination commenced in May 2005 and is ongoing.
While we do not currently believe that the multi-state market
conduct examination will have a material adverse effect upon our
consolidated financial position or results of operations, state
insurance regulatory agencies have authority to levy monetary
fines and penalties resulting from findings made during the
course of such examinations.
|
|
|
Negative
publicity regarding our business practices and about the health
insurance industry in general may harm our business and
adversely affect our results of operations and financial
condition.
|
The health and life insurance industry and related products and
services we provide attracts negative publicity from consumer
advocate groups and the media. Negative publicity may result in
increased regulation and legislative scrutiny of industry
practices as well as increased litigation, which may further
increase our costs of doing business and adversely affect our
profitability by impeding our ability to market our products and
services, requiring us to change our products or services or
increasing the regulatory burdens under which we operate.
|
|
|
HealthMarkets
failure to secure and enhance cost-effective healthcare provider
network contracts may result in a loss of insureds
and/or
higher medical costs and adversely affect HealthMarkets
results of operations.
|
Our results of operations and competitive position could be
adversely affected by our inability to enter into or maintain
satisfactory relationships with networks of hospitals,
physicians, dentists, pharmacies and other healthcare providers.
The failure to secure cost-effective healthcare provider network
contracts may result in a loss of insureds or higher medical
costs. In addition, the inability to contract with provider
networks, the inability to terminate contracts with existing
provider networks and enter into arrangements with new provider
networks to serve the same market,
and/or the
inability of providers to provide adequate care, could adversely
affect our results of operations.
|
|
|
HealthMarkets
inability to obtain funds from its insurance subsidiaries may
cause it to experience reduced cash flow, which could affect the
Companys ability to pay its obligations to creditors as
they become due.
|
We are a holding company, and our principal assets are our
investments in our separate operating subsidiaries, including
our regulated insurance subsidiaries. Our ability to fund our
cash requirements is largely dependent upon our ability to
access cash from our subsidiaries. Our insurance subsidiaries
are subject to regulations that limit their ability to transfer
funds to us. If we are unable to obtain funds from our insurance
subsidiaries, we will experience reduced cash flow, which could
affect our ability to pay our obligations to creditors as they
become due.
|
|
|
A failure
of our information systems to provide timely and accurate
information could adversely affect our business and results of
operations.
|
Information processing is critical to our business, and a
failure of our information systems to provide timely and
accurate information could adversely affect our business and
results of operations. The failure to maintain an effective and
efficient information system or disruptions in our information
system could cause disruptions in our business operations,
including (a) failure to comply with prompt pay laws;
(b) loss of existing insureds; (c) difficulty in
attracting new insureds; (d) disputes with insureds,
providers and agents; (e) regulatory problems;
(f) increases in administrative expenses; and
(g) other adverse consequences.
19
|
|
|
Changes
in government regulation could increase the costs of compliance
or cause us to discontinue marketing our products in certain
states.
|
We conduct business in a heavily regulated industry, and changes
in government regulation could increase the costs of compliance
or cause us to discontinue marketing our products in certain
states. Some of the federal and state regulations promulgated
under the Health Insurance Portability and Accountability Act of
1996, or HIPAA, relating to healthcare reform have required us
to implement changes in our programs and systems in order to
maintain compliance. We have incurred significant expenditures
as a result of HIPAA regulations and expect to continue to incur
expenditures as various regulations become effective.
|
|
|
We may
not have enough statutory capital and surplus to continue to
write business.
|
Our continued ability to write business is dependent on
maintaining adequate levels of statutory capital and surplus to
support the policies we write. Our new business writing
typically results in net losses on a statutory basis during the
early years of a policy. The resulting reduction in statutory
surplus, or surplus strain, limits our ability to seek new
business due to statutory restrictions on premium to surplus
ratios and statutory surplus requirements. If we cannot generate
sufficient statutory surplus to maintain minimum statutory
requirements through increased statutory profitability,
reinsurance or other capital generating alternatives, we will be
limited in our ability to realize additional premium revenue
from new business writing, which could have a material adverse
effect on our financial condition and results of operations or,
in the event that our statutory surplus is not sufficient to
meet minimum premium to surplus and risk-based capital ratios in
any state, we could be prohibited from writing new policies in
such state.
|
|
|
Our
reserves for current and future claims may be inadequate and any
increase to such reserves could have a material adverse effect
on our financial condition and results of operations.
|
We calculate and maintain reserves for current and future claims
using assumptions about numerous variables, including our
estimate of the probability of a policyholder making a claim,
the severity and duration of such claim, the mortality rate of
our policyholders, the persistency or renewal of our policies in
force and the amount of interest we expect to earn from the
investment of premiums. The adequacy of our reserves depends on
the accuracy of our assumptions. We cannot assure you that our
actual experience will not differ from the assumptions used in
the establishment of reserves. Any variance from these
assumptions could have a material adverse effect on our
financial condition
and/or
results of operations.
|
|
|
Litigation
may result in financial losses or harm our reputation and may
divert management resources.
|
Current and future litigation may result in financial losses,
harm our reputation and require the dedication of significant
management resources. We are regularly involved in litigation.
The litigation naming us as a defendant ordinarily involves our
activities as an insurer. In recent years, many insurance
companies, including us, have been named as defendants in class
actions relating to market conduct or sales practices.
For our general claim litigation, we maintain reserves based on
experience to satisfy judgments and settlements in the normal
course. Management expects that the ultimate liability, if any,
with respect to general claim litigation, after consideration of
the reserves maintained, will not be material to the
consolidated financial condition of the Company. Nevertheless,
given the inherent unpredictability of litigation, it is
possible that an adverse outcome in certain claim litigation
involving punitive damages could, from time to time, 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.
20
|
|
|
If we
fail to comply with extensive state and federal regulations, we
will be subject to penalties, which may include fines and
suspension and which may adversely affect our results of
operations and financial condition.
|
We are subject to extensive governmental regulation and
supervision. Most insurance regulations are designed to protect
the interests of policyholders rather than stockholders and
other investors. This regulation, generally administered by a
department of insurance in each state in which we do business,
relates to, among other things:
|
|
|
|
|
approval of policy forms and premium rates;
|
|
|
|
standards of solvency, including risk-based capital
measurements, which are a measure developed by the National
Association of Insurance Commissioners and used by state
insurance regulators to identify insurance companies that
potentially are inadequately capitalized;
|
|
|
|
licensing of insurers and their agents;
|
|
|
|
restrictions on the nature, quality and concentration of
investments;
|
|
|
|
restrictions on transactions between insurance companies and
their affiliates;
|
|
|
|
restrictions on the size of risks insurable under a single
policy;
|
|
|
|
requiring deposits for the benefit of policyholders;
|
|
|
|
requiring certain methods of accounting;
|
|
|
|
prescribing the form and content of records of financial
condition required to be filed; and
|
|
|
|
requiring reserves for losses and other purposes.
|
State insurance departments also conduct periodic examinations
of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of
insurance companies, holding company issues and other matters.
Our business depends on compliance with applicable laws and
regulations and our ability to maintain valid licenses and
approvals for our operations. Regulatory authorities have broad
discretion to grant, renew, or revoke licenses and approvals.
Regulatory authorities may deny or revoke licenses for various
reasons, including the violation of regulations. In some
instances, we follow practices based on our interpretations of
regulations, or those that we believe to be generally followed
by the industry, which may be different from the requirements or
interpretations of regulatory authorities. If we do not have the
requisite licenses and approvals and do not comply with
applicable regulatory requirements, the insurance regulatory
authorities could preclude or temporarily suspend us from
carrying on some or all of our activities or otherwise penalize
us. That type of action could have a material adverse effect on
our business. Our failure to comply with new or existing
government regulation could subject us to significant fines and
penalties. Our efforts to measure, monitor and adjust our
business practices to comply with current laws are ongoing.
Failure to comply with enacted regulations could result in
significant fines, penalties, or the loss of one or more of our
licenses. As governmental regulation changes, the costs of
compliance may cause us to change our operations significantly,
or adversely impact the healthcare provider networks with which
we do business, which may adversely affect our business and
results of operations. In addition, changes in the level of
regulation of the insurance industry (whether federal, state or
foreign), or changes in laws or regulations themselves or
interpretations by regulatory authorities, could have a material
adverse effect on our business.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
We currently own and occupy our executive offices located at
9151 Boulevard 26, North Richland Hills, Texas
76180-5605
and 8825 Bud Jensen Drive, North Richland Hills, Texas
76180-5605
comprising in the aggregate approximately 281,000 and
30,000 square feet, respectively, of office and warehouse
space. In addition, we lease office space at various locations.
21
|
|
Item 3.
|
Legal
Proceedings
|
See Note P of Notes to Consolidated Financial
Statements, the terms of which are incorporated by reference
herein.
|
|
Item 4.
|
Submissions
of Matters to a Vote of Security Holders
|
The Companys Annual Meeting of Stockholders was held on
October 12, 2006. As of September 12, 2006 (the record
date for the meeting) an aggregate of 29,818,044 shares of
Class A-1
and
Class A-2
common stock were issued and outstanding. The following
individuals were elected to the Companys Board of
Directors to hold office for the ensuing year.
|
|
|
|
|
|
|
|
|
Nominee
|
|
In Favor
|
|
|
Withheld/Against
|
|
|
Allen F. Wise
|
|
|
26,410,034
|
|
|
|
0
|
|
William J. Gedwed
|
|
|
26,410,034
|
|
|
|
0
|
|
Chinh E. Chu
|
|
|
26,410,034
|
|
|
|
0
|
|
Adrian M. Jones
|
|
|
26,410,034
|
|
|
|
0
|
|
Mural R. Josephson
|
|
|
26,410,034
|
|
|
|
0
|
|
Matthew S. Kabaker
|
|
|
26,410,034
|
|
|
|
0
|
|
Andrew S. Kahr
|
|
|
26,410,034
|
|
|
|
0
|
|
Kamil M. Salame
|
|
|
26,410,034
|
|
|
|
0
|
|
Steven J. Shulman
|
|
|
26,410,034
|
|
|
|
0
|
|
Nathaniel M. Zilkha
|
|
|
26,410,034
|
|
|
|
0
|
|
The results of the voting for the proposal to ratify the change
in corporate name from UICI to HealthMarkets,
Inc. were as follows:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
|
26,410,034
|
|
|
|
0
|
|
|
|
0
|
|
The results of the voting for the proposal to approve of the
HealthMarkets 2006 Management Stock Option Plan were as follows:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
|
26,410,034
|
|
|
|
0
|
|
|
|
0
|
|
The results of the voting for the proposal to ratify the
appointment of KPMG LLP as the Companys independent
registered public accounting firm to audit the accounts of the
Company for the fiscal year ending December 31, 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
For
|
|
Against
|
|
Abstain
|
|
|
26,410,034
|
|
|
|
0
|
|
|
|
0
|
|
22
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys shares were traded on the New York Stock
Exchange (NYSE) under the symbol UCI
until April 5, 2006, the date of the Merger. The table
below sets forth on a per share basis, for the periods
indicated, the high and low closing sales prices of the Common
Stock on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Fiscal Year Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
33.25
|
|
|
$
|
24.10
|
|
2nd Quarter
|
|
|
30.56
|
|
|
|
21.90
|
|
3rd Quarter
|
|
|
36.17
|
|
|
|
29.35
|
|
4th Quarter
|
|
|
36.40
|
|
|
|
35.47
|
|
Fiscal Year Ended
December 31, 2006
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
36.99
|
|
|
$
|
35.79
|
|
2nd Quarter (through April 5)
|
|
|
37.00
|
|
|
|
36.97
|
|
3rd Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
4th Quarter
|
|
|
N/A
|
|
|
|
N/A
|
|
Upon completion of the Merger on April 5, 2006 between the
Company and affiliates of The Blackstone Group, Goldman Sachs
Capital Partners and DLJ Merchant Banking Partners, shares of
the Companys Common Stock were delisted from trading on
the New York Stock Exchange. Subsequent to such delisting, there
has been no established public trading market in our shares.
As of March 9, 2007, there were approximately 31 holders of
record of
Class A-1
Common Stock and 1,517 holders of record of
Class A-2
Common Stock.
On August 18, 2004, the Companys Board of Directors
adopted a policy of issuing a regular semi-annual cash dividend
on shares of its common stock. In accordance with the dividend
policy, on August 18, 2004, the Companys Board of
Directors declared a regular semi-annual cash dividend of $0.25
on each share of Common Stock, which dividend was paid on
September 15, 2004 to shareholders of record at the close
of business on September 1, 2004. On February 9, 2005,
the Companys Board of Directors declared a regular
semi-annual cash dividend of $0.25 per share and a special
cash dividend of $0.25 per share. The regular and special
dividend were paid on March 15, 2005 to shareholders of
record at the close of business on February 21, 2005. On
July 28, 2005, the Companys Board of Directors
declared a regular semi-annual cash dividend of $0.25 on each
share of Common Stock, which dividend was paid on
September 15, 2005 to shareholders of record at the close
of business on August 22, 2005.
Since the execution on September 15, 2005, of a definitive
agreement contemplating the acquisition of the Company in a cash
merger by a group of private equity firms, the Company has not
declared or paid additional dividends on shares of its common
stock.
In addition, dividends paid by the Companys domestic
insurance subsidiaries to the Company out of earned surplus in
any year that are in excess of limits set by the laws of the
state of domicile require prior approval of state regulatory
authorities in that state.
During the year ended December 31, 2006, the Company issued
an aggregate of 74,365 unregistered shares of its
Class A-1
common stock to certain newly-appointed executive officers and
directors of the Company for an aggregate consideration of
$2.8 million. All such sales of securities were made in
reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended
(and/or Regulation D promulgated thereunder) for
transactions by an issuer not involving a public offering. The
proceeds of such sales were used for general corporate purposes.
23
Issuer
Purchases of Equity Securities
Set forth in the table below is certain information with respect
to open market purchases by the Company of shares of Common
Stock in each month prior to April 5, 2006 (the date of
completion of the Merger) (a) pursuant to the authority
granted under the Companys previously announced share
repurchase program, (b) to facilitate
agent-participants contributions to, and to satisfy the
Companys commitment to issue its shares upon vesting of
matching credits under, the stock accumulation plans established
for the benefit of the Companys agents (see
Note Q of Notes to Consolidated Financial Statements),
and (c) by the trustee for the Companys Employee
Stock Ownership and Retirement Savings Plan (which includes
shares purchased with employee contributions as well as the
portion attributable to the Companys matching
contributions prior to the Merger):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchase of Equity Securities - Common Stock
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Purchased as Part of Publicly
|
|
|
Shares That May yet
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
be Purchased Under
|
|
Period
|
|
Shares Purchased(1)
|
|
|
Paid per Share ($)
|
|
|
Programs(2)
|
|
|
the Plan or Program
|
|
|
01/1/06-01/31/06
|
|
|
13,999
|
|
|
|
36.17
|
|
|
|
|
|
|
|
618,100
|
|
02/1/06-02/28/06
|
|
|
33,824
|
|
|
|
36.65
|
|
|
|
|
|
|
|
618,100
|
|
03/1/06-03/31/06
|
|
|
44,077
|
|
|
|
36.86
|
|
|
|
|
|
|
|
618,100
|
|
04/1/06-04/30/06
|
|
|
2
|
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
91,902
|
|
|
|
36.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares purchased other than through a publicly
announced plan or program includes 15,142 shares purchased
with respect to the stock accumulation plans established for the
benefit of Companys agents and 76,760 shares
purchased for participants in the HealthMarkets 401(k) and
Savings Plan. See Note R of Notes to Consolidated
Financial Statements. |
|
(2) |
|
In November 1998, the Company announced the authorization to
repurchase 4,500,000 common shares, and the Company reconfirmed
the repurchase program on February 28, 2001 and again on
February 11, 2004. On April 28, 2004, the Company
announced the authorization to repurchase an additional
1,000,000 common shares under the program. The repurchase
program was terminated upon public announcement of the Merger. |
Set forth below is a summary of the Companys purchases of
shares of HealthMarkets, Inc.
Class A-2
common stock following the Merger completed on April 5,
2006, during each of the months in the nine-month period ended
December 31, 2006, pursuant to the terms of the
Companys agent stock accumulation plans established for
the benefit of the Companys agents (See Note Q
of the Notes to Consolidated Financial Statements):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchase of Equity Securities -
Class A-2
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Purchased as Part of Publicly
|
|
|
Shares That May yet
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
be Purchased Under
|
|
Period
|
|
Shares Purchased(1)
|
|
|
Paid per Share ($)
|
|
|
Programs
|
|
|
the Plan or Program
|
|
|
04/1/06-04/30/06
|
|
|
17,662
|
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
05/1/06-05/31/06
|
|
|
25,092
|
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
06/1/06-06/30/06
|
|
|
32,011
|
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
07/1/06-07/31/06
|
|
|
26,611
|
|
|
|
38.35
|
|
|
|
|
|
|
|
|
|
08/1/06-08/31/06
|
|
|
26,684
|
|
|
|
38.39
|
|
|
|
|
|
|
|
|
|
09/1/06-09/30/06
|
|
|
40,251
|
|
|
|
38.37
|
|
|
|
|
|
|
|
|
|
10/1/06-10/31/06
|
|
|
26,125
|
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
11/1/06-11/30/06
|
|
|
25,988
|
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
12/1/06-12/31/06
|
|
|
26,169
|
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
246,593
|
|
|
|
38.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
(1) |
|
The number of shares purchased other than through a publicly
announced plan or program includes 246,593
Class A-2 shares
purchased from the stock accumulation plans established for the
benefit of the Companys agents. These shares are reflected
as treasury shares on the Companys Consolidated Balance
Sheet. |
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table sets forth certain information with respect
to shares of the Companys
Class A-1
and
Class A-2
common stock that may be issued under HealthMarkets equity
compensation plans as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future
|
|
|
|
|
|
|
|
|
|
Issuance Under Equity
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average Exercise
|
|
|
Compensation Plans
|
|
|
|
be Issued Upon Exercise
|
|
|
Price of Outstanding
|
|
|
(Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants and
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
1,259,115
|
(1)
|
|
$
|
35.51
|
|
|
|
2,888,208
|
(2)
|
Equity compensation plans not
approved by security holders(5)
|
|
|
1,491,987
|
(3)
|
|
$
|
0.00
|
|
|
|
4,496,128
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,751,102
|
|
|
$
|
16.25
|
|
|
|
7,384,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 97,863 stock options exercisable at a weighted average
exercise price of $9.25 under the UICI 1987 Stock Option Plan.
Also includes 1,161,252 stock options granted at a weighted
average exercise price of $37.72 under the HealthMarkets 2006
Management Stock Option Plan. |
|
(2) |
|
Includes securities available for future issuance as follows:
UICI 1987 Stock Option Plan, 2,559,719 shares;
HealthMarkets 2006 Management Stock Option Plan,
328,489 shares. |
|
(3) |
|
Includes (a) 944,466 shares issuable upon vesting of
matching credits granted to participants under the Agency
Matching Total Ownership Plan established for the benefit of
agents associated with UGA Association Field
Services and (b) 547,521 shares issuable upon vesting
of matching credits granted to participants under the Matching
Agency Contribution Plan established for the benefit of agents
associated with Cornerstone America. |
|
(4) |
|
Includes securities available for future issuance as follows:
Agents Matching Total Ownership Plan,
2,044,990 shares; Matching Agency Contribution Plan,
2,451,138 shares. |
|
(5) |
|
Effective April 5, 2006, the Agency Matching Total
Ownership Plan I and the Agents Matching Total Ownership
Plan II (which were established for the benefit of agents
associated with UGA Association Field Services) were
consolidated, amended and restated and thereafter renamed the
HealthMarkets Agency Matching Total Ownership Plan. Also
effective April 5, 2006, the Matching Agency Contribution
Plan I and the Matching Agency Contribution Plan II (which
were established for the benefit of agents associated with
Cornerstone America) were consolidated, amended and restated and
thereafter renamed the HealthMarkets Matching Agency
Contribution Plan. The amended and restated plans were not
approved by security holders. See Note Q of Notes to
Consolidated Financial Statements for additional information
regarding the Agency Matching Total Ownership Plan and the
Matching Agency Contribution Plan. |
25
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data as of and for
each of the five years in the period ended December 31,
2006 has been derived from the audited Consolidated Financial
Statements of the Company. The following data should be read in
conjunction with the Consolidated Financial Statements and the
notes thereto and Managements Discussion and Analysis
of Financial Condition and Results of Operations included
herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts and operating
ratios)
|
|
|
Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
2,146,571
|
|
|
$
|
2,121,218
|
|
|
$
|
2,069,109
|
|
|
$
|
1,825,162
|
|
|
$
|
1,380,033
|
|
Income from continuing operations
before income taxes
|
|
|
352,298
|
|
|
|
313,150
|
|
|
|
221,149
|
|
|
|
131,916
|
|
|
|
76,759
|
|
Income from continuing operations
|
|
|
216,568
|
|
|
|
202,970
|
|
|
|
145,881
|
|
|
|
87,324
|
|
|
|
51,054
|
|
Income (loss) from discontinued
operations
|
|
|
21,170
|
|
|
|
531
|
|
|
|
15,677
|
|
|
|
(72,990
|
)
|
|
|
953
|
|
Net income
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
|
$
|
46,863
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
6.19
|
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
|
$
|
1.88
|
|
|
$
|
1.08
|
|
Diluted earnings per common share
|
|
$
|
6.07
|
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
|
$
|
1.82
|
|
|
$
|
1.05
|
|
Earnings (loss) per share from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share
|
|
$
|
0.61
|
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
$
|
(1.57
|
)
|
|
$
|
0.02
|
|
Diluted earnings (loss) per common
share
|
|
$
|
0.59
|
|
|
$
|
0.01
|
|
|
$
|
0.33
|
|
|
$
|
(1.52
|
)
|
|
$
|
0.02
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
6.80
|
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
|
$
|
0.99
|
|
Diluted earnings per common share
|
|
$
|
6.66
|
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
|
$
|
0.96
|
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(1)
|
|
|
57
|
%
|
|
|
57
|
%
|
|
|
61
|
%
|
|
|
65
|
%
|
|
|
63
|
%
|
Expense ratio(1)
|
|
|
32
|
%
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
89
|
%
|
|
|
88
|
%
|
|
|
94
|
%
|
|
|
99
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, cash and cash
overdraft(2)
|
|
$
|
1,834,600
|
|
|
$
|
1,774,188
|
|
|
$
|
1,710,589
|
|
|
$
|
1,579,131
|
|
|
$
|
1,355,918
|
|
Total assets
|
|
|
2,588,329
|
|
|
|
2,371,530
|
|
|
|
2,345,658
|
|
|
|
2,126,959
|
|
|
|
1,915,188
|
|
Total policy liabilities
|
|
|
1,135,174
|
|
|
|
1,174,264
|
|
|
|
1,258,671
|
|
|
|
1,184,984
|
|
|
|
1,028,969
|
|
Total debt
|
|
|
556,070
|
|
|
|
15,470
|
|
|
|
15,470
|
|
|
|
18,951
|
|
|
|
7,922
|
|
Student loan credit facilities
|
|
|
118,950
|
|
|
|
130,900
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
Stockholders equity
|
|
|
524,385
|
|
|
|
871,081
|
|
|
|
714,145
|
|
|
|
587,568
|
|
|
|
585,050
|
|
Stockholders equity per
share(3)
|
|
$
|
17.94
|
|
|
$
|
19.05
|
|
|
$
|
15.18
|
|
|
$
|
12.15
|
|
|
$
|
11.76
|
|
26
|
|
|
(1) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(2) |
|
Does not include restricted cash. See Note A of
Notes to Consolidated Financial Statements. |
|
(3) |
|
Excludes the unrealized gains (losses) on securities available
for sale, which gains are reported in accumulated other
comprehensive income (loss) as a separate component of
stockholders equity. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our historical results of operations
and of our liquidity and capital resources should be read in
conjunction with the Selected Financial Data and the
Consolidated Financial Statements of the Company and related
notes thereto included herein.
Overview
We offer insurance (primarily health and life) to niche consumer
and institutional markets. Through our subsidiaries we issue
primarily health insurance policies, covering individuals and
families, to the self-employed, association groups and small
businesses, and life insurance policies to markets that we
believe are underserved. We believe that we have the largest
direct selling organization in the health insurance field, with
approximately 2,100 independent writing agents per week in the
field selling health insurance to the self employed market in
44 states.
The Companys revenues have historically consisted
primarily of premiums derived from sales of its indemnity, PPO,
student group and voluntary employer group health plans and from
life insurance policies. Revenues also include investment income
derived from our investment portfolio and other income, which
consists primarily of income derived by the Self-Employed Agency
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products.
Premiums on health insurance contracts are recognized as earned
over the period of coverage on a pro rata basis. Premiums on
traditional life insurance are recognized as revenue when due.
The table below sets forth premium by insurance division for
each of the three most recent fiscal years (excluding for all
periods presented premium associated with our former Star HRG
Division and Student Insurance Division, which we disposed of in
July and December 2006, respectively):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,330,298
|
|
|
$
|
1,394,644
|
|
|
$
|
1,355,328
|
|
Life Insurance Division
|
|
|
65,716
|
|
|
|
61,936
|
|
|
|
46,503
|
|
Other Insurance
|
|
|
33,873
|
|
|
|
33,856
|
|
|
|
14,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
$
|
1,429,887
|
|
|
$
|
1,490,436
|
|
|
$
|
1,415,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys expenses consist primarily of insurance
claims expense and expenses associated with the underwriting and
acquisition of insurance policies. Claims expenses consist
primarily of payments to physicians, hospitals and other
healthcare providers under health policies and include an
estimated amount for incurred but not reported and unpaid
claims. Underwriting, policy acquisition costs and insurance
expenses consist of direct expenses incurred across all
insurance lines in connection with issuance, maintenance and
administration of in-force insurance policies, including
amortization of deferred policy acquisition costs, commissions
paid to agents, administrative expenses and premium taxes. The
Company also incurs other direct expenses in connection with
generating income derived by the Self-Employed Agency Division
from ancillary services and membership
27
marketing and administrative services provided to the membership
associations that make available to their members the
Companys health insurance products.
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
These claim liabilities are developed using actuarial principles
and assumptions that consider a number of items, including
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. See discussion below under the
caption Critical Accounting Policies and
Estimates Claims Liabilities and
Note G of Notes to Consolidated Financial Statements.
In connection with various stock-based compensation plans that
we maintain for the benefit of our employees and independent
agents, we record non-cash variable stock-based compensation
expense in amounts that depend and fluctuate based upon the fair
market value (as determined by the Companys Board of
Directors since the Merger) of the Companys common stock.
See discussion below under the caption Variable
Stock-Based Compensation and Note Q of Notes to
Consolidated Financial Statements. The accounting treatment of
the Companys agent plans has resulted and will continue to
result in unpredictable stock-based compensation charges,
primarily dependent upon future fluctuations in the fair value
of HealthMarkets
Class A-2
common stock.
The Companys business segments for financial reporting
purposes include (i) the Insurance segment (which includes
the businesses of the Companys Self-Employed Agency
Division (SEA), the Life Insurance Division and
Other Insurance); (ii) Other Key Factors (which includes
investment income not allocated to the Insurance segment,
realized gains or losses on sale of investments, interest
expense on corporate debt, general expenses relating to
corporate operations, merger transaction expenses, variable
non-cash stock-based compensation and operations that do not
constitute reportable operating segments); and
(iii) Disposed Operations (which includes the
Companys former Star HRG Division and former Student
Insurance Division).
2006
Sales of Student Insurance Division and Star HRG
Division
In July 2006 and December 2006, the Company sold in two separate
transactions substantially all of the assets comprising its
former Star HRG unit and its former Student Insurance Division.
In connection with these sales, in 2006 the Company recorded an
aggregate pre-tax gain in the amount of $201.7 million, of
which $101.5 million was attributable to the Star HRG
transaction and $100.2 million was attributable to the
Student Insurance transaction.
As part of the sale transactions, insurance subsidiaries of the
Company entered into 100% coinsurance arrangements with each of
the purchasers, pursuant to which (a) the purchasers agreed
to assume liability for all future claims associated with the
Star HRG and Student Insurance blocks of group accident and
health insurance policies in force as of the respective closing
dates and (b) the Companys insurance subsidiaries
transferred to the purchasers cash in an amount equal to the
actuarial estimate of those future claims. While under the terms
of the coinsurance agreements the Companys insurance
subsidiaries have ceded liability for all future claims made on
the insurance policies in force at the closing date, the
insurance subsidiaries remain primarily liable on those
policies. Accordingly, for financial reporting purposes, at
December 31, 2006 the Company has reflected and will
continue to reflect the policy liabilities ceded to and assumed
by the purchasers under the coinsurance agreements as
Policy liabilities on its Consolidated Balance
Sheet, with a corresponding amount recorded as a
Reinsurance receivable on its Consolidated Balance
Sheet. At December 31, 2006, the Company had recorded on
its Consolidated Balance Sheet aggregate policy liabilities in
the amount of $1.1 billion, of which $134.1 million
was attributable to the Star HRG and Student Insurance policy
liabilities ceded to and assumed by the purchasers under the
coinsurance agreements. Correspondingly, at December 31,
2006, the Company had recorded a reinsurance receivable in the
amount of $155.3 million, of which an aggregate of
$132.8 million was attributable to the Star HRG and Student
Insurance coinsurance agreements. In addition, for financial
reporting purposes the Company will continue to report in future
periods the residual results of operations of these businesses
(anticipated to consist solely of residual wind-down expenses
and any
true-up,
claw-back or earn-out items associated with the sales) in
continuing operations and classified to the Companys
Disposed Operations business segment.
See Note C of Notes to Consolidated Financial
Statements for additional information regarding the terms of the
sales of the Star HRG Division and Student Insurance Division
assets.
28
Results
of Operations Overview
During 2006, the Companys financial condition, cash flow
and results from operations were impacted by the following key
factors and developments:
|
|
|
Sale
of Star HRG Division and Student Insurance
Division
|
The Companys 2006 results of operations reflected
significant one-time gains recognized in connection with the
sales of the Companys Star HRG unit and Student Insurance
Division, which were sold by the Company in July and December of
2006, respectively. In particular, the Company recorded an
aggregate pre-tax gain associated with these sales in the amount
of $201.7 million, of which $101.5 million was
attributable to the Star HRG transaction and $100.2 million
was attributable to the Student Insurance transaction.
|
|
|
Results
at SEA Division
|
The Companys 2006 results from continuing operations
reflected a 24%
year-over-year
decrease in operating income at its SEA Division. The SEA
Division reported operating income in 2006 of
$236.5 million, compared to operating income of
$310.5 million in 2005. Results at the Companys SEA
Division in 2006 were negatively impacted by an increase in the
health loss ratio (which increased to 54.3% in 2006 from 51.5%
in 2005) and additional expense in the amount of
$15.5 million associated with a change in accounting policy
with respect to amortization of a portion of deferred
acquisition costs. See the discussion below under the
caption 2006 Change in Accounting Methodology..
|
|
|
Significant
Merger Costs
|
During the second quarter of 2006, the Company utilized cash in
the amount of approximately $120.9 million for professional
fees and expenses associated with the Merger. Of this total cash
expended, $47.3 million ($38.2 million, net of tax)
was expensed and charged to income in the second quarter of 2006
(which expenses are reflected under the caption Other
expenses on the Companys Consolidated Statement of
Operations), $31.7 million of fees and expenses related to
raising equity in the Merger was reflected as a direct reduction
in stockholders equity, and $41.9 million
($9.4 million of prepaid monitoring fees and
$32.5 million of capitalized financing costs attributable
to the issuance of the debt in the Merger) was capitalized
(which capitalized financing costs are reflected under the
caption Other assets on the Companys
Consolidated Balance Sheet). As of December 31, 2006 all of
the prepaid monitoring fees and $6.3 million of the
capitalized financing cost had been amortized. See Note I.
The Company did not incur any additional Merger transaction
costs through the remainder of 2006.
|
|
|
Interest
Expense on Debt Incurred in the Merger
|
During 2006, the Company incurred interest expense in the amount
of $28.6 million associated with indebtedness incurred in
connection with the Merger completed on April 5, 2006. In
connection with the Merger, 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 I of Notes to Consolidated Financial
Statements
|
|
|
Improved
Results at Disposed Operations
|
The Companys 2006 results from continuing operations
benefited from improved results at its former Student Insurance
Division, which the Company sold in December 2006. The
Companys Student Insurance Division reported operating
earnings of $12.2 million in 2006 (through its date of sale
on December 1, 2006), compared to operating losses of
$(8.9) million in 2005. This improved performance reflected
more favorable loss experience on the Student Insurance book of
business, lower administrative expenses as a percentage of
earned premium and better utilization of network service
agreements with healthcare providers.
29
2006
Change in Accounting Policy
Effective December 31, 2006, the Company changed its
accounting policy with respect to the amortization of a portion
of deferred acquisition costs associated with commissions paid
to agents.
The Company formerly capitalized commissions and premium taxes
associated with its SEA Division business (classified as
deferred acquisition costs (DAC)) and amortized all
of these costs over the period (and in proportion to the amount)
that the associated unearned premium was earned. The Company
utilized this accounting methodology in preparing its reported
2006 interim financial statements.
Following adoption of SEC Staff Accounting
Bulletin No. 108 (SAB 108), Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements, the
Company recently performed an analysis to determine the
appropriate portion of commissions to be deferred over the lives
of the underlying policies. Generally, first year and second
year commission rates are higher than the renewal year
commission rates, and the Company has determined that the
preferred approach is to capitalize the excess commissions
associated with those earlier years and amortize the capitalized
costs ratably over the estimated life of the policy, rather than
in the year the commissions were paid. Accordingly, effective
January 1, 2006 the Company has elected to change its
accounting methodology by amortizing the first and second year
excess commissions ratably over a two year period (based on
recent persistency studies showing that SEA policies have an
average life of 2.09 years).
The Company has elected to utilize the one time special
transition provisions of SAB 108 and recorded an adjustment
to retained earnings effective January 1, 2006 to reflect
this change in accounting policy with respect to the
capitalization and amortization of deferred acquisition costs
associated with excess first and second year commissions. As of
January 1, 2006, the change in accounting policy resulted
in an increase in the Companys capitalized deferred
acquisition cost (DAC) of $77.6 million, a related increase
to its deferred tax liability by $27.1 million, and a net
increase to shareholders equity of $50.5 million. The
adoption of this new accounting policy had the effect of
increasing reported underwriting, policy acquisition costs and
insurance expenses (classified to its SEA Division) in 2006 by
the amount of $15.5 million and, correspondingly, reducing
after-tax net income by $10.1 million. The Company has
reflected the effects of this change in accounting policy for
the 2006 interim periods in the Quarterly Results
table in Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Over time, the Companys prior accounting policy with
respect to amortization of the excess first and second year
commissions resulted in an understatement of an asset (by 4% in
2004 and by 3% in 2005) and shareholders equity (by
8% in 2004 and by 6% in 2005). In addition, had the Company in
prior periods properly deferred and amortized excess first and
second year commissions over the average policy life of two
years, the Companys previously reported 2005 net
income would have been reduced by $8.5 million (or by less
than 4%) and the Companys previously reported
2004 net income would have been reduced by $698,000 (or by
less than 1%). Prior to the adoption of SAB 108, the
Company considered the guidance contained in SEC Staff
Accounting Bulletin No. 99, Materiality, using
the roll-over method (which has as its
primary focus the income statement, including the reversing
effect of prior year misstatements) and concluded that its
previously reported results of operations for the SEA Division
for the years ending 2003 through 2005 were not materially
distorted.
30
Results
of Operations
The table below sets forth certain summary information about our
consolidated operating results for each of the three most recent
fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
|
|
$
|
1,671,571
|
|
|
|
(10
|
)%
|
|
$
|
1,855,969
|
|
|
|
2
|
%
|
|
$
|
1,812,892
|
|
Life premiums and other
considerations
|
|
|
65,675
|
|
|
|
7
|
%
|
|
|
61,565
|
|
|
|
34
|
%
|
|
|
45,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
|
1,737,246
|
|
|
|
(9
|
)%
|
|
|
1,917,534
|
|
|
|
3
|
%
|
|
|
1,858,743
|
|
Investment income
|
|
|
104,147
|
|
|
|
7
|
%
|
|
|
97,788
|
|
|
|
14
|
%
|
|
|
85,868
|
|
Other income
|
|
|
104,634
|
|
|
|
(2
|
)%
|
|
|
106,656
|
|
|
|
(9
|
)%
|
|
|
117,827
|
|
Gains (losses) on sale of
investments
|
|
|
200,544
|
|
|
|
NM
|
|
|
|
(760
|
)
|
|
|
NM
|
|
|
|
6,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,146,571
|
|
|
|
1
|
%
|
|
|
2,121,218
|
|
|
|
3
|
%
|
|
|
2,069,109
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, and settlement
expenses
|
|
|
996,617
|
|
|
|
(9
|
)%
|
|
|
1,092,136
|
|
|
|
(4
|
)%
|
|
|
1,134,901
|
|
Underwriting, policy acquisition
costs, and insurance expenses
|
|
|
581,163
|
|
|
|
(6
|
)%
|
|
|
621,532
|
|
|
|
(1
|
)%
|
|
|
625,761
|
|
Variable stock compensation expense
|
|
|
16,603
|
|
|
|
130
|
%
|
|
|
7,214
|
|
|
|
(50
|
)%
|
|
|
14,307
|
|
Other expenses
|
|
|
158,749
|
|
|
|
96
|
%
|
|
|
81,177
|
|
|
|
17
|
%
|
|
|
69,574
|
|
Interest expense
|
|
|
41,141
|
|
|
|
NM
|
|
|
|
6,009
|
|
|
|
76
|
%
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,794,273
|
|
|
|
(1
|
)%
|
|
|
1,808,068
|
|
|
|
(2
|
)%
|
|
|
1,847,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
352,298
|
|
|
|
13
|
%
|
|
|
313,150
|
|
|
|
42
|
%
|
|
|
221,149
|
|
Federal income taxes
|
|
|
135,730
|
|
|
|
23
|
%
|
|
|
110,180
|
|
|
|
46
|
%
|
|
|
75,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
216,568
|
|
|
|
7
|
%
|
|
|
202,970
|
|
|
|
39
|
%
|
|
|
145,881
|
|
Income from discontinued
operations (net of income tax benefit)
|
|
|
21,170
|
|
|
|
NM
|
|
|
|
531
|
|
|
|
NM
|
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
237,738
|
|
|
|
17
|
%
|
|
$
|
203,501
|
|
|
|
NM
|
|
|
$
|
161,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM: not meaningful
31
The table below sets forth certain summary information about our
consolidated operating results for each of the three most recent
fiscal years. For purposes of this presentation, we have
reclassified and netted the operating revenues and expenses
attributable to our former Star HRG Division and Student
Insurance Division (which we disposed of in July and December
2006, respectively) to the line item Income (loss) from
Student Insurance operations and Star HRG operations (net of
income tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
|
|
$
|
1,364,212
|
|
|
|
(5
|
)%
|
|
$
|
1,428,871
|
|
|
|
4
|
%
|
|
$
|
1,370,107
|
|
Life premiums and other
considerations
|
|
|
65,675
|
|
|
|
7
|
%
|
|
|
61,565
|
|
|
|
34
|
%
|
|
|
45,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
|
1,429,887
|
|
|
|
(4
|
)%
|
|
|
1,490,436
|
|
|
|
5
|
%
|
|
|
1,415,958
|
|
Investment income
|
|
|
98,896
|
|
|
|
9
|
%
|
|
|
90,964
|
|
|
|
15
|
%
|
|
|
78,962
|
|
Other income
|
|
|
101,817
|
|
|
|
(2
|
)%
|
|
|
103,562
|
|
|
|
(6
|
)%
|
|
|
110,730
|
|
Gains (losses) on sale of
investments
|
|
|
200,544
|
|
|
|
NM
|
|
|
|
(760
|
)
|
|
|
NM
|
|
|
|
6,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,831,144
|
|
|
|
9
|
%
|
|
|
1,684,202
|
|
|
|
4
|
%
|
|
|
1,612,321
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, and settlement
expenses
|
|
|
784,896
|
|
|
|
1
|
%
|
|
|
777,695
|
|
|
|
NM
|
|
|
|
776,449
|
|
Underwriting, policy acquisition
costs, and insurance expenses
|
|
|
492,003
|
|
|
|
NM
|
|
|
|
491,521
|
|
|
|
2
|
%
|
|
|
481,263
|
|
Variable stock compensation expense
|
|
|
16,603
|
|
|
|
130
|
%
|
|
|
7,214
|
|
|
|
(50
|
)%
|
|
|
14,307
|
|
Other expenses
|
|
|
158,749
|
|
|
|
96
|
%
|
|
|
81,177
|
|
|
|
17
|
%
|
|
|
69,574
|
|
Interest expense
|
|
|
41,141
|
|
|
|
NM
|
|
|
|
6,009
|
|
|
|
76
|
%
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,493,392
|
|
|
|
10
|
%
|
|
|
1,363,616
|
|
|
|
1
|
%
|
|
|
1,345,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
337,752
|
|
|
|
5
|
%
|
|
|
320,586
|
|
|
|
20
|
%
|
|
|
267,311
|
|
Federal income taxes
|
|
|
130,639
|
|
|
|
16
|
%
|
|
|
112,782
|
|
|
|
23
|
%
|
|
|
91,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
(excluding Student Insurance operations and Star HRG operations)
|
|
|
207,113
|
|
|
|
1
|
%
|
|
|
207,804
|
|
|
|
18
|
%
|
|
|
175,886
|
|
Income from discontinued
operations (net of income tax benefit)
|
|
|
21,170
|
|
|
|
NM
|
|
|
|
531
|
|
|
|
(97
|
)%
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income excluding Student Insurance
operations and Star HRG operations
|
|
|
228,283
|
|
|
|
10
|
%
|
|
|
208,335
|
|
|
|
9
|
%
|
|
|
191,563
|
|
Income (loss) from Student
Insurance operations (net of tax benefit (expense) of $(4,283),
$3,105 and $17,319 for 2006, 2005 and 2004, respectively) and
Star HRG operations (net of tax benefit (expense) of $(808),
$(502) and $(1,162) for 2006, 2005 and 2004, respectively)(a)
|
|
|
9,455
|
|
|
|
NM
|
|
|
|
(4,834
|
)
|
|
|
(84
|
)%
|
|
|
(30,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
237,738
|
|
|
|
17
|
%
|
|
$
|
203,501
|
|
|
|
26
|
%
|
|
$
|
161,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See Managements Discussion and Analysis of
Financial Condition and Results of Operations
2006 Compared to 2005, Disposed Operations. |
NM: not meaningful
32
Revenues and income from continuing operations before federal
income taxes (operating income) for each of the
Companys business segments and divisions in 2006, 2005 and
2004 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,462,088
|
|
|
$
|
1,525,968
|
|
|
$
|
1,496,199
|
|
Life Insurance Division
|
|
|
87,782
|
|
|
|
83,037
|
|
|
|
67,613
|
|
Other Insurance(1)
|
|
|
35,337
|
|
|
|
34,799
|
|
|
|
14,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
1,585,207
|
|
|
|
1,643,804
|
|
|
|
1,578,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors
|
|
|
246,847
|
|
|
|
41,104
|
|
|
|
34,719
|
|
Inter-segment Eliminations
|
|
|
(910
|
)
|
|
|
(706
|
)
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues excluding Disposed
Operations
|
|
|
1,831,144
|
|
|
|
1,684,202
|
|
|
|
1,612,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
240,050
|
|
|
|
290,378
|
|
|
|
306,325
|
|
Star HRG Division
|
|
|
75,377
|
|
|
|
146,638
|
|
|
|
150,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Disposed Operations
|
|
|
315,427
|
|
|
|
437,016
|
|
|
|
456,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,146,571
|
|
|
$
|
2,121,218
|
|
|
$
|
2,069,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before federal income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
236,466
|
|
|
$
|
310,466
|
|
|
$
|
260,745
|
|
Life Insurance Division
|
|
|
5,264
|
|
|
|
7,053
|
|
|
|
4,690
|
|
Other Insurance(1)
|
|
|
5,488
|
|
|
|
4,658
|
|
|
|
1,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
247,218
|
|
|
|
322,177
|
|
|
|
266,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income on equity,
realized gains and losses, general corporate expenses and other
(including interest on corporate debt)
|
|
|
155,156
|
|
|
|
14,680
|
|
|
|
14,768
|
|
Merger transaction costs(2)
|
|
|
(48,019
|
)
|
|
|
(9,057
|
)
|
|
|
|
|
Variable stock-based compensation
|
|
|
(16,603
|
)
|
|
|
(7,214
|
)
|
|
|
(14,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Key Factors
|
|
|
90,534
|
|
|
|
(1,591
|
)
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
12,238
|
|
|
|
(8,870
|
)
|
|
|
(49,482
|
)
|
Star HRG Division
|
|
|
2,308
|
|
|
|
1,434
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Disposed Operations
|
|
|
14,546
|
|
|
|
(7,436
|
)
|
|
|
(46,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing
operations before federal income taxes
|
|
$
|
352,298
|
|
|
$
|
313,150
|
|
|
$
|
221,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects results of a subsidiary (ZON Re USA
LLC) established in the third quarter of 2003 to
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. |
|
(2) |
|
Includes the incremental costs associated with the acquisition
of the Company by a group of private equity investors. |
33
2006
Compared to 2005
In 2006 HealthMarkets reported consolidated revenues and income
from continuing operations of $2.147 billion and
$216.6 million ($6.07 per diluted share),
respectively, compared to revenues and income from continuing
operations in 2005 of $2.121 billion and
$203.0 million ($4.31 per diluted share),
respectively. Reflecting results from discontinued operations,
the Company reported overall 2006 net income of
$237.7 million $6.66 per diluted share), compared to
2005 net income of $203.5 million ($4.32 per
diluted share).
Unless the context indicates otherwise, the following discussion
comparative of our 2006 and 2005 results of operations excludes
the operations of the Companys Student Insurance Division
and Star HRG Division which were sold in July and December 2006,
respectively.
Continuing
Operations
Revenues. HealthMarkets revenues
increased to $1.831 billion in 2006 from
$1.684 billion in 2005, an increase of $146.9 million,
or 9%. The Companys revenues were particularly impacted by
the following factors:
|
|
|
|
|
The Company experienced a 5% decrease in health premium revenue
(to $1.364 billion in 2006 from $1.429 billion in
2005). This decrease was attributable to the decline in
submitted annualized premium volume at the SEA Division in years
prior to 2006. However, during 2006, annualized premium volume
increased by 10% over annualized premium volume in 2005.
|
|
|
|
Life premiums and other considerations increased by 7%, to
$65.7 million in 2006 from $61.6 million in 2005. This
increase was attributable primarily to incremental sales of life
products through relationships with two independent marketing
companies and growth in renewal business from life products sold
during 2004 and 2005.
|
|
|
|
Due to an increase in the prevailing yield on short-term
securities, student loans and other investments, investment
income increased to $98.9 million in 2006 compared to
$91.0 million in 2005.
|
|
|
|
Other income (consisting primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products) decreased by 2% to $101.8 million in
2006 from $103.6 million in 2005. The decrease in other
income was primarily attributable to a decrease in fee and other
income earned by the Companys former real estate
subsidiary, the activities of which were immaterial and which
the Company is dissolving in the first quarter of 2007.
|
|
|
|
In 2006, the Company recognized net gains on sale of investments
of $200.5 million compared to losses on sales of investments of
$(760,000) in 2005. The increase in 2006 was primarily
attributable to gains realized from the sales of the
Companys Star HRG Division and the Student Insurance
Division in 2006.
|
Benefits and Expenses. HealthMarkets
total benefits and expenses increased to $1.493 billion in
2006 from $1.364 billion in 2005, an increase of
$129.8 million, or 10%. The Companys benefits and
expenses were particularly impacted by the following factors:
|
|
|
|
|
Despite a 5% decrease in health premium revenue, benefits,
claims and settlement expenses increased nominally to
$784.9 million in 2006 from $777.7 million in 2005,
primarily as a result of an increase in the claim benefits as a
percentage of earned premium associated with business written at
the SEA Division. See Self-Employed Agency discussion
below.
|
|
|
|
Underwriting costs, policy acquisition costs and insurance
expenses remained virtually unchanged in the periods
($492.0 million in 2006 and $491.5 million in 2005). A
decrease in administrative expenses in 2006 at the SEA Division
was somewhat offset by additional amortization of capitalized
acquisition costs in the amount of $15.5 million associated
with a change in the Companys method of accounting for a
portion of deferred acquisition costs. See discussion
above under the caption 2006 Change in Accounting
Policy.
|
|
|
|
The Company maintains for the benefit of its independent agents
various stock-based compensation plans, in connection with which
it records non-cash variable stock-based compensation expense
(benefit) in amounts that depend and fluctuate based upon the
performance of the Companys common stock. In 2006, the
|
34
|
|
|
|
|
Company recognized a non-cash stock based compensation expense
in the amount of $16.6 million, compared to non-cash stock
based compensation expense of $7.2 million in 2005. The
increase is principally due to greater change in share price
during 2006 compared to 2005.
|
|
|
|
|
|
Other expenses (consisting primarily of direct expenses incurred
by the Company in connection with providing ancillary services
and membership marketing and administrative services provided to
the membership associations that make available to their members
the Companys health insurance products and general
expenses relating to corporate operations) increased to
$158.7 million in 2006 from $81.2 million in 2005. The
majority of the increase is attributed to incremental costs in
the amount of $48.0 million associated with the Merger,
$9.4 million of advisory fees incurred since the Merger
date for services provided by the Private Equity Investors and
additional overhead expenses incurred in connection with the
previously announced corporate name change and branding
initiative.
|
|
|
|
Total interest expense on corporate debt and the Companys
student loan credit facilities increased to $41.1 million
in 2006 from $6.0 million in 2005, primarily due to the
incremental indebtedness incurred in connection with the Merger
and the increase in borrowing rates on the student loan debt.
|
Operating Income. Operating income (exclusive
of operating results at the Companys Star HRG Division and
Student Insurance Division) increased by 5% to
$337.8 million in 2006 from $320.6 million in 2005. As
discussed more fully below, the Companys 2006 results from
continuing operations benefited from realized gains of
$201.7 million recorded upon the sales of the Star HRG and
Student Insurance divisions. These gains were offset by an
increase in Merger costs of $39.0 million (from
$9.0 million in 2005 to $48.0 million in 2006), a
$35.1 million increase in interest expense (from
$6.0 million in 2005 to $41.1 million in
2006) and a 24% decrease in operating income at the SEA
Division (from $310.5 million in 2005 to
$236.5 million in 2006).
Our operating segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of
the Companys Self-Employed Agency (SEA) Division, the Life
Insurance Division and Other Insurance, (b) Other Key
Factors, which includes investment income not otherwise
allocated to the Insurance segment, realized gains and losses,
interest expense on corporate debt, general expenses relating to
corporate operations, variable stock compensation and other
unallocated items, and (c) Disposed Operations, which
includes the Companys former Star HRG Division and former
Student Insurance Division (which operations were sold on
July 11, 2006 and December 1, 2006, respectively).
35
Self-Employed
Agency Division
Set forth below is certain summary financial and operating data
for the Companys Self-Employed Agency (SEA)
Division for each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenue
|
|
$
|
1,330,298
|
|
|
|
(5
|
)%
|
|
$
|
1,394,644
|
|
|
|
3
|
%
|
|
$
|
1,355,328
|
|
Investment income(1)
|
|
|
31,809
|
|
|
|
(3
|
)%
|
|
|
32,725
|
|
|
|
(3
|
)%
|
|
|
33,640
|
|
Other income
|
|
|
99,981
|
|
|
|
1
|
%
|
|
|
98,599
|
|
|
|
(8
|
)%
|
|
|
107,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,462,088
|
|
|
|
(4
|
)%
|
|
|
1,525,968
|
|
|
|
2
|
%
|
|
|
1,496,199
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
721,688
|
|
|
|
0
|
%
|
|
|
718,502
|
|
|
|
(2
|
)%
|
|
|
736,678
|
|
Underwriting and acquisition
expenses
|
|
|
444,032
|
|
|
|
0
|
%
|
|
|
445,411
|
|
|
|
0
|
%
|
|
|
445,737
|
|
Other expenses(1)
|
|
|
59,902
|
|
|
|
16
|
%
|
|
|
51,589
|
|
|
|
(3
|
)%
|
|
|
53,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,225,622
|
|
|
|
1
|
%
|
|
|
1,215,502
|
|
|
|
(2
|
)%
|
|
|
1,235,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
236,466
|
|
|
|
(24
|
)%
|
|
$
|
310,466
|
|
|
|
19
|
%
|
|
$
|
260,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
54.3
|
%
|
|
|
5
|
%
|
|
|
51.5
|
%
|
|
|
(5
|
)%
|
|
|
54.4
|
%
|
Expense ratio(2)
|
|
|
33.3
|
%
|
|
|
4
|
%
|
|
|
32.0
|
%
|
|
|
(3
|
)%
|
|
|
32.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
87.6
|
%
|
|
|
5
|
%
|
|
|
83.5
|
%
|
|
|
(4
|
)%
|
|
|
87.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
17.8
|
%
|
|
|
(20
|
)%
|
|
|
22.3
|
%
|
|
|
16
|
%
|
|
|
19.2
|
%
|
Average number of writing agents
in period
|
|
|
2,143
|
|
|
|
5
|
%
|
|
|
2,039
|
|
|
|
(12
|
)%
|
|
|
2,329
|
|
Submitted annualized volume(4)
|
|
$
|
791,152
|
|
|
|
10
|
%
|
|
$
|
720,448
|
|
|
|
(16
|
)%
|
|
$
|
860,377
|
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
|
(4) |
|
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 Company. |
For 2006, the SEA Division reported operating income of
$236.5 million compared to operating income of
$310.5 million in 2005. Operating income at the SEA
Division as a percentage of earned premium revenue
(i.e., operating margin) in 2006 was 17.8% compared
to 22.3% in 2005.
Operating income at the SEA Division in 2006 was negatively
impacted by a decrease in earned premium revenue, an increase in
the loss ratio (benefits as a percentage of earned premium), and
an increase in underwriting, policy acquisition costs and
insurance expenses as a percentage of earned premium. Earned
premium revenue at the SEA Division decreased to
$1.330 billion in 2006 compared to earned premium revenue
of $1.395 billion in 2005. The decrease in earned premium
revenue at the Self-Employed Agency division during 2006 was due
to the decline in submitted annualized premium volume in 2004
and 2005. However, during 2006, annualized premium volume
increased by 10% over annualized premium volume in 2005. The
increase in the loss ratio was due to a product mix shift to new
health insurance products in the Companys
recently-introduced CareOne product suite and cost
36
containment expenses resulting from the Companys
initiatives to control medical costs. Products in the CareOne
product suite (sales of which in 2006 represented approximately
14% of total SEA Division earned premium revenue) are expected
to provide a higher proportion of the premium as benefits. In
2006, underwriting, policy acquisition costs and insurance
expenses included additional amortization of capitalized policy
acquisition costs in the amount of $15.5 million associated
with a change in the Companys method of accounting for a
portion of deferred acquisition costs. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations 2006 Change
in Accounting Policy above.
At December 31, 2006, the Company changed its accounting
policy, effective January 1, 2006, with respect to the
amortization of a portion of deferred acquisition costs
associated with commissions paid to agents. Generally, first
year and second year commission rates are higher than the
renewal year commission rates, and the Company amortized
(i.e., charged to income) the excess commissions
associated with those earlier years ratably over the estimated
life of the policy rather than in the year the commission is
paid. Accordingly, the Company has elected to amortize the first
and second year excess commissions over a two year period, based
on recent persistency studies indicating that SEA policies have
an average life of 2.09 years. Applying recently adopted
SEC Staff Accounting Bulletin No. 108 as of
January 1, 2006, the Company has determined that
adoption of this new accounting policy with respect to the
amortization of the excess first and second year commissions had
the effect of increasing reported underwriting, policy
acquisition costs and insurance expenses in 2006 by the amount
of $15.5 million. See Note A of Notes to
Consolidated Financial Statements.
Results for the year ended December 31, 2006, also
reflected a benefit in the amount of $47.1 million
attributable to refinements of the Companys estimate for
its claim liability on its health insurance products. Of the
$47.1 million of refinements to the estimated claim
liability, $44.5 million is attributable to prior years.
|
|
|
|
|
Approximately $11.2 million of the benefit (recorded in the
third quarter) was due to refinements of the estimate of the
unpaid claim liability for the most recent incurral months. The
calculation of the claim liability now distinguishes between
more mature products with reliable historical data and newer or
lower volume products that have not established a reliable
historical trend. Had this refinement been made at
December 31, 2005, the claim liability estimate would have
been reduced by $14.8 million.
|
|
|
|
An additional adjustment to the claim liability (approximately
$25.1 million, of which $10.5 million was recorded in
the third quarter and $14.6 million was recorded in the
fourth quarter) was attributable to an update of the completion
factors used in estimating the claim liability for the
Accumulated Covered Expense (ACE) rider, an optional
benefit rider available with certain scheduled/basic health
insurance products that provides for catastrophic coverage for
covered expenses under the contract that generally exceed
$100,000 or, in certain cases, $75,000. This rider pays benefits
at 100% after the stop loss amount is reached, up to the
aggregate maximum amount of the contract for expenses covered by
the rider. This adjustment to the claim liability reflects both
actual historical data for the ACE rider and historical data
derived from other products. Previously, the completion factors
were calculated with more emphasis placed on historical data
derived from other products, since there was insufficient data
related to the ACE product rider to provide accurate and
reliable completion factors. Had these refinements been made at
December 31, 2005, the claim liability estimate would have
been reduced by $19.1 million.
|
|
|
|
In the second quarter of 2006, the Company determined that
sufficient provision for large claims could be made within its
normal reserve process, eliminating the need for a
previously-established separate large claim reserve. This
refinement resulted in a reduction in the claim liability of
$10.8 million. Had this refinement been made at
December 31, 2005, the claim liability estimate would have
been reduced by $10.6 million.
|
During 2005, the Company recorded a benefit in the amount of
$40.9 million attributable to various refinements to the
Companys estimate of its claim liability.
The decrease in operating margin to 17.8% in 2006 compared to
22.3% in 2005 was attributable primarily to the increase in loss
ratio and increase in underwriting, policy acquisition costs and
insurance expenses in the amount of $15.5 million
associated with a change in accounting policy with respect to
amortization of a portion of deferred acquisition costs. See
Note A of Notes to Consolidated Financial Statements.
37
Total submitted annualized premium volume at the SEA Division
increased by 10%, to $791.2 million in 2006 from
$720.4 million in 2005. The increase in submitted
annualized premium volume can be attributed primarily to an
increase in the average number of writing agents per week in the
field (from 2,039 in 2005 to 2,143 in 2006) and an increase
in writing agent productivity. During 2006, the amount of weekly
submitted annualized premium volume per writing agent increased
by 4.5%, even as the average premium per policy decreased by
4.5%.
Life
Insurance Division
Set forth below is certain summary financial and operating data
for the Companys Life Insurance Division for each of the
three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenue
|
|
$
|
65,716
|
|
|
|
6
|
%
|
|
$
|
61,936
|
|
|
|
33
|
%
|
|
$
|
46,503
|
|
Investment income(1)
|
|
|
20,222
|
|
|
|
(1
|
)%
|
|
|
20,349
|
|
|
|
0
|
%
|
|
|
20,425
|
|
Other income
|
|
|
1,844
|
|
|
|
145
|
%
|
|
|
752
|
|
|
|
10
|
%
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
87,782
|
|
|
|
6
|
%
|
|
|
83,037
|
|
|
|
23
|
%
|
|
|
67,613
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
44,459
|
|
|
|
12
|
%
|
|
|
39,684
|
|
|
|
18
|
%
|
|
|
33,613
|
|
Underwriting and acquisition
expenses(1)
|
|
|
38,059
|
|
|
|
5
|
%
|
|
|
36,300
|
|
|
|
24
|
%
|
|
|
29,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
82,518
|
|
|
|
9
|
%
|
|
|
75,984
|
|
|
|
21
|
%
|
|
|
62,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5,264
|
|
|
|
(25
|
)%
|
|
$
|
7,053
|
|
|
|
50
|
%
|
|
$
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
The Companys Life Insurance Division reported operating
income in 2006 of $5.3 million compared to operating income
of $7.1 million in 2005. The
year-over-year
decrease in operating income was attributable to an increase in
death claims during the first half of 2006 and an increase in
administrative expenses, due to a decrease in capitalized
deferred acquisition costs (administration costs) related to a
decline in first year sales volume.
In 2006, the Companys Life Insurance Division generated
annualized paid premium volume (i.e., the aggregate
annualized life premium amount associated with new life
insurance policies issued by the Company) in the amount of
$20.0 million compared to $32.9 million in 2005.
Annualized paid premium volume for 2006 was negatively impacted
by service issues associated with an outside vendor that assists
the Company in gathering key underwriting information, and a
delay in production due to the introduction of redesigned
products that are expected to improve return on capital.
38
Other
Insurance
Set forth below is certain summary financial and operating data
for the Companys Other Insurance division for each of the
three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenue
|
|
$
|
33,873
|
|
|
|
0
|
%
|
|
$
|
33,856
|
|
|
|
140
|
%
|
|
$
|
14,127
|
|
Investment income(1)
|
|
|
1,356
|
|
|
|
73
|
%
|
|
|
783
|
|
|
|
593
|
%
|
|
|
113
|
|
Other income
|
|
|
108
|
|
|
|
(33
|
)%
|
|
|
160
|
|
|
|
8
|
%
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
35,337
|
|
|
|
2
|
%
|
|
|
34,799
|
|
|
|
142
|
%
|
|
|
14,388
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
18,748
|
|
|
|
(4
|
)%
|
|
|
19,508
|
|
|
|
217
|
%
|
|
|
6,158
|
|
Underwriting and acquisition
expenses(1)
|
|
|
11,101
|
|
|
|
4
|
%
|
|
|
10,633
|
|
|
|
56
|
%
|
|
|
6,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
29,849
|
|
|
|
(1
|
)%
|
|
|
30,141
|
|
|
|
132
|
%
|
|
|
12,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5,488
|
|
|
|
18
|
%
|
|
$
|
4,658
|
|
|
|
229
|
%
|
|
$
|
1,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
55.3
|
%
|
|
|
(4
|
)%
|
|
|
57.6
|
%
|
|
|
32
|
%
|
|
|
43.6
|
%
|
Expense ratio(2)
|
|
|
32.8
|
%
|
|
|
4
|
%
|
|
|
31.4
|
%
|
|
|
(35
|
)%
|
|
|
48.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
88.1
|
%
|
|
|
(1
|
)%
|
|
|
89.0
|
%
|
|
|
(3
|
)%
|
|
|
91.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
16.2
|
%
|
|
|
17
|
%
|
|
|
13.8
|
%
|
|
|
38
|
%
|
|
|
10.0
|
%
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The loss ratio represents benefits, claims and settlement
expenses related to accident insurance and reinsurance contracts
stated as a percentage of earned premiums. The expense ratio
represents underwriting, contract acquisition costs and expenses
related to accident insurance and reinsurance contracts stated
as a percentage of earned premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
The Other Insurance division consists of the operations of ZON
Re USA LLC (an 82.5%-owned subsidiary), which underwrites,
administers and issues accidental death, accidental death and
dismemberment (AD&D), accident medical and accident
disability insurance products, both on a primary and on a
reinsurance basis. In 2006, ZON Re generated revenues and
operating income of $35.3 million and $5.5 million,
respectively, compared to revenues and operating income of
$34.8 million and $4.7 million, respectively, in 2005.
Other Key
Factors
The Companys Other Key Factors segment includes investment
income not otherwise allocated to the Insurance segment,
realized gains and losses, interest expense on corporate debt,
variable stock compensation and other unallocated items and
general expenses relating to corporate operations. In 2005 and
2006, the incremental costs associated with the acquisition of
the Company by a group of private equity investors were also
reflected in the results of the Other Key Factors segment.
39
Set forth below is a summary of the components of operating
income at the Companys Other Key Factors segment for each
of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income on equity
|
|
$
|
35,563
|
|
|
|
10
|
%
|
|
$
|
32,418
|
|
|
|
83
|
%
|
|
$
|
17,735
|
|
Realized gain on sale of Star HRG
|
|
|
101,497
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
Realized gain on sale of Student
Insurance
|
|
|
100,166
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
Realized gains (losses) on
investments
|
|
|
1,458
|
|
|
|
NM
|
|
|
|
(760
|
)
|
|
|
110
|
%
|
|
|
7,606
|
|
Expense related to early
extinguishment of debt
|
|
|
(2,637
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
Merger transaction expenses
|
|
|
(48,019
|
)
|
|
|
430
|
%
|
|
|
(9,057
|
)
|
|
|
NM
|
|
|
|
|
|
Interest expense on non-student
loan debt
|
|
|
(34,823
|
)
|
|
|
NM
|
|
|
|
(1,148
|
)
|
|
|
6
|
%
|
|
|
(1,083
|
)
|
Interest expense on student loan
debt
|
|
|
(6,318
|
)
|
|
|
30
|
%
|
|
|
(4,861
|
)
|
|
|
108
|
%
|
|
|
(2,334
|
)
|
Variable stock-based compensation
expense
|
|
|
(16,603
|
)
|
|
|
130
|
%
|
|
|
(7,214
|
)
|
|
|
(50
|
)%
|
|
|
(14,307
|
)
|
General corporate expenses and
other
|
|
|
(39,750
|
)
|
|
|
262
|
%
|
|
|
(10,969
|
)
|
|
|
53
|
%
|
|
|
(7,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
90,534
|
|
|
|
NM
|
|
|
$
|
(1,591
|
)
|
|
|
(301
|
)%
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM: Not meaningful
The Other Key Factors segment reported operating income in 2006
of $90.5 million, compared to an operating loss of
$(1.6) million in 2005.
The increase in operating income in the Other Key Factors
segment in 2006 reflected the gains of approximately
$201.7 million on the sales of substantially all of the
assets comprising the Companys Star HRG and Student
Insurance operations completed in 2006. Results in 2006 also
included Merger transaction costs in the amount of
$48.0 million. The increase in interest expense on
non-student loan debt in the 2006 period was due to the
Merger-related indebtedness incurred in the second quarter of
2006. In connection with the Merger, 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 I of Consolidated Financial Statements.
Other significant items affecting the 2006 results in the Other
Key Factors segment included a $9.4 million increase in
variable stock-based compensation and an increase in general
corporate expenses for the period to $39.8 million compared
to $11.0 million incurred in the comparable period in 2005.
These additional overhead expenses were principally associated
with the change of the Companys corporate name, the
Companys corporate branding initiative and monitoring fees
paid to the Private Equity Investors. See Note O of
Notes to Consolidated Financial Statements.
Disposed
Operations
On July 11, 2006 and December 1, 2006, the Company
completed the sales of the assets formerly comprising its Star
HRG and Student Insurance Divisions, respectively. See
Note C of Notes to Consolidated Financial Statements.
40
Set forth below is certain summary financial and operating data
for the Companys former Student Insurance Division for
each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006(4)
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenue
|
|
$
|
233,280
|
|
|
|
(17
|
)%
|
|
$
|
282,486
|
|
|
|
(5
|
)%
|
|
$
|
297,036
|
|
Investment income(1)
|
|
|
4,882
|
|
|
|
(20
|
)%
|
|
|
6,121
|
|
|
|
1
|
%
|
|
|
6,089
|
|
Other income
|
|
|
1,888
|
|
|
|
7
|
%
|
|
|
1,771
|
|
|
|
(45
|
)%
|
|
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
240,050
|
|
|
|
(17
|
)%
|
|
|
290,378
|
|
|
|
(5
|
)%
|
|
|
306,325
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
165,334
|
|
|
|
(26
|
)%
|
|
|
222,306
|
|
|
|
(16
|
)%
|
|
|
265,698
|
|
Underwriting and acquisition
expenses(1)
|
|
|
62,478
|
|
|
|
(19
|
)%
|
|
|
76,942
|
|
|
|
(15
|
)%
|
|
|
90,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
227,812
|
|
|
|
(24
|
)%
|
|
|
299,248
|
|
|
|
(16
|
)%
|
|
|
355,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
12,238
|
|
|
|
(238
|
)%
|
|
$
|
(8,870
|
)
|
|
|
NM
|
|
|
$
|
(49,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
70.9
|
%
|
|
|
(10
|
)%
|
|
|
78.7
|
%
|
|
|
(12
|
)%
|
|
|
89.4
|
%
|
Expense ratio(2)
|
|
|
26.8
|
%
|
|
|
(1
|
)%
|
|
|
27.2
|
%
|
|
|
(11
|
)%
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
97.7
|
%
|
|
|
(8
|
)%
|
|
|
105.9
|
%
|
|
|
(12
|
)%
|
|
|
119.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
5.2
|
%
|
|
|
NM
|
|
|
|
(3.1
|
)%
|
|
|
NM
|
|
|
|
(16.7
|
)%
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
|
(4) |
|
The Student Insurance Division was sold on December 1,
2006. Except for some minor transition expenses recorded in
December 2006, the 2006 amounts represent eleven months of
activity. |
NM: Not meaningful
The Companys Student Insurance Division (which offered
tailored health insurance programs that generally provide single
school year coverage to individual students at colleges and
universities) reported operating income of $12.2 million in
2006 compared to operating losses of $(8.9) million in
2005. Results for 2006 at the Student Insurance Division
reflected a significant improvement in loss experience on the
Student Insurance book of business. The loss ratio on this
business decreased to 70.9% in 2006, from 78.7% in 2005, which
reflected the benefits of non-renewing certain underperforming
schools for the
2005-2006
school year. For 2006, operating results also benefited from
lower administrative expenses as a percentage of earned premium
and from better utilization of network service agreements with
healthcare providers. Earned premium revenue at the Student
Insurance Division decreased to $233.3 million in 2006,
from $282.5 million in 2005. The decrease in premium
reflected, in part, the non-renewal in the
2005-2006
school year of certain accounts that had performed poorly in the
2004-2005
school year. In addition, premium in 2006 reflected eleven
months of activity through the date of sale.
41
Set forth below is certain summary financial and operating data
for the Companys former Star HRG Division (which designed,
marketed and administered limited benefit health insurance plans
for entry level, high turnover, and hourly employees) for each
of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2006(4)
|
|
|
(Decrease)
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenue
|
|
$
|
74,079
|
|
|
|
(49
|
)%
|
|
$
|
144,612
|
|
|
|
(1
|
)%
|
|
$
|
145,749
|
|
Investment income(1)
|
|
|
369
|
|
|
|
(48
|
)%
|
|
|
703
|
|
|
|
(14
|
)%
|
|
|
817
|
|
Other income
|
|
|
929
|
|
|
|
(30
|
)%
|
|
|
1,323
|
|
|
|
(66
|
)%
|
|
|
3,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
75,377
|
|
|
|
(49
|
)%
|
|
|
146,638
|
|
|
|
(3
|
)%
|
|
|
150,463
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
46,387
|
|
|
|
(50
|
)%
|
|
|
92,135
|
|
|
|
(1
|
)%
|
|
|
92,754
|
|
Underwriting and acquisition
expenses(1)
|
|
|
26,682
|
|
|
|
(50
|
)%
|
|
|
53,069
|
|
|
|
(2
|
)%
|
|
|
54,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
73,069
|
|
|
|
(50
|
)%
|
|
|
145,204
|
|
|
|
(1
|
)%
|
|
|
147,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
2,308
|
|
|
|
61
|
%
|
|
$
|
1,434
|
|
|
|
(57
|
)%
|
|
$
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
62.6
|
%
|
|
|
(2
|
)%
|
|
|
63.7
|
%
|
|
|
0
|
%
|
|
|
63.6
|
%
|
Expense ratio(2)
|
|
|
36.0
|
%
|
|
|
(2
|
)%
|
|
|
36.7
|
%
|
|
|
(2
|
)%
|
|
|
37.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
98.6
|
%
|
|
|
(2
|
)%
|
|
|
100.4
|
%
|
|
|
(1
|
)%
|
|
|
101.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
3.1
|
%
|
|
|
210
|
%
|
|
|
1.0
|
%
|
|
|
(57
|
)%
|
|
|
2.3
|
%
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting expenses, policy acquisition costs and
insurance expenses related to health insurance policies stated
as a percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
|
(4) |
|
The Star HRG Division was sold on July 11, 2006. Except for
some minor transition expenses recorded after July 1, 2006,
the 2006 results represent six months of activity. |
The Companys Star HRG Division reported operating income
in 2006 in the amount of $2.3 million, compared to
operating income of $1.4 million in 2005. The loss ratio
associated with the Star HRG business decreased slightly to
62.6% in 2006 from 63.7% in 2005, and the underwriting and
acquisition expense ratio decreased slightly to 36.0% in 2006
from 36.7% in 2005 from initiatives established in the fourth
quarter of 2005. Earned premium revenue at the Star HRG Division
was $74.1 million in 2006, compared to $144.6 million
in 2005, reflecting the sale of the division effective
July 11, 2006.
Discontinued
Operations
The Company reported income from discontinued operations in 2006
in the amount of $21.2 million, net of tax ($0.59 per
diluted share) compared to income from discontinued operations
of $531,000, net of tax ($0.01 per diluted share) in 2005.
The income for the year ended December 31, 2006 consisted
primarily of a tax benefit attributable to the release of
certain tax reserves and valuation allowances on deferred tax
assets related to capital loss carryovers and other capital
items that are currently recoverable as a result of the sale of
the Star HRG Division at a gain. A significant portion of the
released tax allowances and reserves were originally established
during 2003
42
primarily because management did not anticipate realizing before
its expiration the tax benefits of the capital loss carryover
from the 2003 sale of the Companys former student finance
subsidiary.
2005
Compared to 2004
HealthMarkets reported revenues and income from continuing
operations in 2005 of $2.121 billion and
$203.0 million ($4.31 per diluted share),
respectively, compared to 2004 revenues and income from
continuing operations of $2.069 billion and
$145.9 million ($3.07 per diluted share),
respectively. Reflecting results from discontinued operations,
the Company reported overall 2005 net income of
$203.5 million ($4.32 per diluted share), compared to
2004 net income of $161.6 million ($3.40 per diluted
share).
Unless the context indicates otherwise, the following discussion
comparative of our 2005 and 2004 results of operations excludes
the operations of the Companys Star HRG Division and
Student Insurance Division which were sold in July and December
2006, respectively.
Continuing
Operations
Revenues. HealthMarkets revenues
increased to $1.684 billion in 2005 from
$1.612 billion in 2004, an increase of $71.9 million,
or 4%. The Companys revenues were particularly impacted by
the following factors:
|
|
|
|
|
The Company generated a 4% increase in health premium revenue
(to $1.429 billion in 2005 from $1.370 billion in
2004), which increase was primarily attributable to the
assumption of existing health policies acquired in October 2004
as part of the acquisition by the Company of substantially all
of the assets of HealthMarket Inc.
|
|
|
|
Life premiums and other considerations increased by 34%, to
$61.6 million in 2005 from $45.9 million in 2004. This
increase was attributable primarily to sales of newly-designed
life products through its relationships with its two independent
marketing companies.
|
|
|
|
Due to a 6% year over year increase in the book value of
invested assets and an increase in the yield on short-term and
other investments, investment income increased to
$91.0 million in 2005 compared to $79.0 million in
2004.
|
|
|
|
Other income (consisting primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products) decreased by 6% to $103.6 million in
2005 from $110.7 million in 2004. The decrease was
primarily related to a year over year decrease in new business
for which the Company receives membership marketing and
administrative fees.
|
|
|
|
The Company recognized losses on sale of investments of
$(760,000) in 2005 compared to gains on sales of investments of
$6.7 million in 2004. The 2005 losses were primarily
attributable to the impairment of certain fixed maturities
written down in the fourth quarter of 2005.
|
Expenses. HealthMarkets total expenses
increased to $1.364 billion in 2005 from
$1.345 billion in 2004, an increase of $18.6 million,
or 1%. The Companys expenses were particularly impacted by
the following factors:
|
|
|
|
|
Benefits, claims and settlement expenses increased nominally to
$777.7 million in 2005 from $776.5 million in 2004.
|
|
|
|
Underwriting costs, policy acquisition costs and insurance
expenses increased by 2% to $491.5 million in 2005 from
$481.3 million in 2004. The increase was primarily due to
the expenses incurred with the increased new sales at both the
Life Insurance Division and ZON Re.
|
|
|
|
The Company maintains for the benefit of its employees and
independent agents various stock-based compensation plans, in
connection with which it records non-cash variable stock-based
compensation expense (benefit) in amounts that depend and
fluctuate based upon the performance of the Companys
common stock. In 2005, the Company recognized a non-cash stock
based compensation expense in the amount of $7.2 million,
compared to non-cash stock based compensation expense of
$14.3 million in 2004. The decrease is principally due to
the smaller change in share price during 2005 (from $33.90 to
$35.51)
|
43
|
|
|
|
|
compared to 2004 (from $13.28 to $33.90) and a decrease in the
amount of unvested credits to 1,571,952 from 1,904,526.
|
|
|
|
|
|
Other expenses (consisting primarily of direct expenses incurred
by the Company in connection with providing ancillary services
and membership marketing and administrative services provided to
the membership associations that make available to their members
the Companys health insurance products and general
expenses relating to corporate operations) increased by 17%, to
$81.2 million in 2005 from $69.6 million in 2004. The
majority of the increase is attributed to incremental costs in
the amount of $9.1 million associated with the then pending
acquisition of the Company by a group of private equity
investors.
|
|
|
|
Total interest expense increased by 76%, to $6.0 million in
2005 from $3.4 million in 2004, primarily due to an
increase in the interest rates associated with student loan
indebtedness (consisting of borrowings incurred to fund student
loan obligations under the Companys College Fund Life
Division program see Note J of Notes to
Consolidated Financial Statements).
|
Operating Income. Operating income increased
by 20%, to $320.6 million in 2005 from $267.3 million
in 2004. As discussed more fully below, the Companys 2005
results from continuing operations benefited from a significant
year-over-year
increase in operating income at its SEA Division (from
$260.7 million in 2004 to $310.5 million in 2005).
Self-Employed
Agency Division
For 2005, the SEA Division reported operating income of
$310.5 million compared to operating income of
$260.7 million in 2004. Operating income at the SEA
Division as a percentage of earned premium revenue (i.e.,
operating margin) in 2005 was 22.3% compared to 19.2% in
2004.
Operating income at the SEA Division in 2005 was positively
impacted by an increase in earned premium revenue, a lower loss
ratio (from 54.4% in 2004 to 51.5% in 2005) resulting from
favorable claims experience, and a decrease in commission
expenses as a percentage of earned premium. Earned premium
revenue at the SEA Division increased to $1.395 billion in
2005, compared to earned premium revenue of $1.355 billion
in 2004. However, the increase in premium is primarily
attributable to the assumption during the fourth quarter of 2004
of small group policies originally issued by a wholly owned
insurance subsidiary of HealthMarket Inc. (The Company acquired
substantially all of the operating assets of HealthMarket Inc.
on October 8, 2004 see Note C of
Notes to Consolidated Financial Statements). During 2005, the
premium from the traditional health products issued by the SEA
Division decreased approximately 1% due to the decline in
submitted annualized premium volume.
Results at the SEA Division in both 2004 and 2005 reflected an
aggregate benefit attributable to refinements of the
Companys estimate for its claim liability on its health
insurance products. Results at the SEA Division in 2004
reflected a benefit associated with the reduction in the amount
of $47.8 million of claim liabilities established in 2003
in response to a rapid pay down in 2003 of an excess pending
claims inventory. In 2005, the Company recognized an aggregate
benefit attributable to refinements of the Companys
estimate for its claim liability on its health insurance
products in the amount of $40.9 million, of which
$7.6 million was recorded in the first quarter of 2005 and
$33.3 million was recorded in the third quarter of 2005.
|
|
|
|
|
In the first quarter of 2005, the Company recorded a favorable
claim liability adjustment in the amount of $7.6 million
attributable to a refinement of an estimate for the
Companys claim liability established with respect to a
product rider that provides for catastrophic coverage on the SEA
Divisions scheduled health insurance products. See
discussion below under the caption Change in Claims and
Future Benefit Liability Estimates Self-Employed
Agency Division for additional information with respect to
this adjustment.
|
|
|
|
In the third quarter of 2005, the Company recorded an additional
favorable claim liability adjustment in the amount of
$33.3 million attributable to a refinement of the
Companys estimate for its claim liability on its health
insurance products. The largest portion of this adjustment
(approximately $21.0 million) was attributable to a
refinement of the estimate of the unpaid claim liability for the
most recent incurral months. The Company utilizes anticipated
loss ratios to calculate the estimated claim liability for the
most recent incurral months. Despite negligible premium rate
increases implemented on its most popular
|
44
|
|
|
|
|
scheduled health insurance products, the SEA Division has
continued to observe favorable claims experience and, as a
result, loss ratios have not increased as rapidly as
anticipated. This favorable claims experience has been reflected
in the refinement of the anticipated loss ratios used in
estimating the unpaid claim liability for the most recent
incurral months. The remaining portion of the adjustment to the
claim liability (approximately $12.3 million) was
attributable to an update of the completion factors used in the
developmental method of estimating the unpaid claim liability to
reflect more current claims administration practices.
|
As a result of the favorable claims experience in 2005
associated with the SEA Divisions health insurance
products, during the fourth quarter of 2005 the Company
implemented reduced premium rates (average 15% reduction)
on new business in a number of markets.
The increase in operating margin in 2005 compared to 2004 was
attributable primarily to the
year-over-year
increase in earned premium, lower loss ratio and a decrease in
the effective commission rate (due to a decrease in the amount
of first year premium relative to renewal premium, which carries
a lower commission rate compared to commissions on first year
premium). These factors favorably impacting operating margin in
2005 were offset by higher administrative expenses as a
percentage of premium (which resulted from certain
administrative costs associated with the previously announced
multi-state market conduct review) and incremental
administrative costs associated with the Companys small
group business acquired in November 2004.
In 2005, total SEA Division submitted annualized premium volume
decreased by 16.3%, to $720.4 million in 2005 from
$860.4 million in 2004. The decrease in submitted
annualized premium volume can be attributed primarily to a
reduction in the average number of writing agents per week in
the field (from 2,329 in 2004 to 2,039 in 2005).
Life
Insurance Division
The Companys Life Insurance Division reported operating
income in 2005 of $7.1 million compared to operating income
of $4.7 million in 2004. The
year-over-year
increase in operating income was attributable to an increase in
revenue and a decrease in fixed administrative costs as a
percentage of earned premium revenue.
For the year ended December 31, 2005, the Companys
Life Insurance Division generated annualized paid premium volume
(i.e., the aggregate annualized life premium amount
associated with new life insurance policies issued by the
Company) in the amount of $32.9 million compared to
$32.7 million in the corresponding 2004 period. Annualized
paid premium volume for the fourth quarter of 2005 was
negatively impacted by a slowdown in agent recruitment by the
two independent marketing companies that distribute our products
through networks of managing general agents (MGAs), who were
waiting for the 2006 introduction of new life products.
Other
Insurance
During 2003, through a newly formed company, ZON Re USA LLC (an
82.5%-owned subsidiary), we began to underwrite, administer and
issue accidental death, accidental death and dismemberment
(AD&D), accident medical and accident disability insurance
products, both on a primary and on a reinsurance basis. In 2005,
ZON Re generated revenues and operating income of
$34.8 million and $4.7 million, respectively, compared
to revenues and operating income of $14.4 million and
$1.4 million, respectively, in 2004.
Other Key
Factors
The Companys Other Key Factors segment includes investment
income not otherwise allocated to the Insurance segment,
realized gains and losses, interest expense on corporate debt,
variable stock compensation and other unallocated items and
general expenses relating to corporate operations. In 2005, the
incremental costs associated with the pending acquisition of the
Company by a group of private equity investors were also
reflected in the results of the Other Key Factors segment.
The Companys Other Key Factors segment reported operating
losses of $(1.6) million in 2005, compared to operating
income of $461,000 in 2004. The increase in operating losses in
2005 in the Other Key Factors segment was primarily attributable
to a decrease in net realized gains associated with the
Companys investment portfolio
45
(from $7.6 million in net realized gains in 2004 to
$(760,000) in net realized losses in 2005), an increase in
general corporate expenses of $6.3 million and incremental
costs in the amount of $9.1 million associated with the
pending acquisition of the Company by a group of private equity
investors. These unfavorable factors were partially offset by a
$14.7 million increase in investment income on equity and a
$7.1 million
year-over-year
decrease in variable stock-based compensation expense associated
with the various stock accumulation plans established by the
Company for the benefit of its independent agents (from
$14.3 million in 2004 to $7.2 million in 2005).
Disposed
Operations
The Companys Student Insurance Division (which until its
disposition by the Company in December 2006 offered tailored
health insurance programs that generally provide single school
year coverage to individual students at colleges and
universities) reported operating losses of $(8.9) million
in 2005 compared to operating losses of $(49.5) million in
2004. Results for 2005 at the Student Insurance Division
reflected a significant improvement in loss experience on the
Student Insurance book of business. The loss ratio decreased to
78.7% in 2005, from 89.4% in 2004. For 2005, operating results
also benefited from lower administrative expenses as a
percentage of earned premium and from better utilization of
network service agreements with healthcare providers. Results in
2004 also reflected a second quarter impairment charge in the
amount of $6.3 million, which was principally associated
with the abandonment of computer hardware and software assets
associated with a claims processing system. Earned premium
revenue at the Student Insurance Division decreased to
$282.5 million in 2005, from $297.0 million in 2004.
The decrease in premium reflected, in part, the non-renewal in
the
2005-2006
school year of certain accounts that had performed poorly in the
2004-2005
school year.
The Companys former Star HRG Division reported operating
income in 2005 in the amount of $1.4 million, compared to
operating income of $3.3 million in 2004. The loss ratio
associated with the Star HRG business increased slightly to
63.7% in 2005 from 63.6% in 2004, and the underwriting and
acquisition expense ratio decreased slightly to 36.7% in 2005
from 37.4% in 2004. The decrease in Other income
from 2004 to 2005 was associated with the decrease in
administrative fees on business underwritten by a third party
insurance carrier and a decrease in fees received on ancillary
products. Earned premium revenue at the Star HRG Division was
$144.6 million in 2005, compared to $145.7 million in
2004.
Discontinued
Operations
The Company reported income from discontinued operations in 2005
the amount of $531,000, net of tax ($0.01 per diluted
share) compared to income from discontinued operations of
$15.7 million, net of tax ($0.33 per diluted share) in
2004.
Results from discontinued operations for 2004 reflected a
pre-tax gain in the amount of $7.7 million generated from
the sale of the remaining uninsured student loan assets held by
the Companys former Academic Management Services Corp.
subsidiary (which the Company disposed of in November 2003), and
a favorable resolution of a dispute related to the
Companys former Special Risk Division that resulted in
pre-tax income in the amount of $10.7 million.
Variable
Stock-Based Compensation
The Company sponsors a series of stock accumulation plans
established for the benefit of the independent insurance agents
and independent sales representatives associated with its
independent agent field forces, including UGA
Association Field Services and Cornerstone America. In
connection with these plans, the Company has from time to time
recorded and will continue to record non-cash variable
stock-based compensation expense in amounts that depend and
fluctuate based upon the fair value of the Companys common
stock. For financial reporting purposes, the Company reflects
all non-cash variable stock based compensation associated with
its agent stock plans in its Other Key Factors
business segment. See Note Q of Notes to
Consolidated Financial Statements.
The accounting treatment of the Companys agent plans has
resulted and will continue to result in unpredictable non-cash
stock-based compensation charges, primarily dependent upon
future fluctuations in the prevailing fair value of
HealthMarkets common stock. These unpredictable fluctuations in
stock based compensation charges may result in material non-cash
fluctuations in the Companys results of operations.
Unvested benefits
46
under the agent plans vest in January of each year; accordingly,
in periods of general appreciation in the price of HealthMarkets
common stock, the Companys cumulative liability, and
corresponding charge to income, for unvested stock-based
compensation is expected to be greater in each successive
quarter during any given year.
Change in
Claims and Future Benefit Liability Estimates
Self-Employed Agency Division
2006
Change in Claim Liability Estimates
Results for the year ended December 31, 2006, reflected a
benefit in the amount of $47.1 million attributable to
refinements of the Companys estimate for its claim
liability on its health insurance products. For financial
reporting purposes, these refinements are considered to be
changes in estimate, resulting from additional information and
subsequent developments from prior periods. Accordingly, the
financial impact of these refinements was accounted for in the
respective periods that the refinements occurred. Of the
$47.1 million of refinements to the estimated claim
liability, $44.5 million is attributable to prior years.
The refinements to the estimate for the Companys claim
liability are more particularly described below:
|
|
|
|
|
Approximately $11.2 million of the benefit (recorded in the
third quarter) was due to refinements of the estimate of the
unpaid claim liability for the most recent incurral months. The
calculation of the claim liability now distinguishes between
more mature products with reliable historical data and newer or
lower volume products that have not established a reliable
historical trend. Had this refinement been made at
December 31, 2005, the claim liability estimate would have
been reduced by $14.8 million.
|
|
|
|
An additional adjustment to the claim liability (approximately
$25.1 million of which $10.5 million was recorded in
the third quarter and $14.6 million was recorded in the
fourth quarter) was attributable to an update of the completion
factors used in estimating the claim liability for the
Accumulated Covered Expense (ACE) rider, an optional
benefit rider available with certain scheduled/basic health
insurance products that provides for catastrophic coverage for
covered expenses under the contract that generally exceed
$100,000 or, in certain cases, $75,000. This rider pays benefits
at 100% after the stop loss amount is reached up to the
aggregate maximum amount of the contract for expenses covered by
the rider. This adjustment reflects both actual historical data
for the ACE rider and historical data derived from other
products. In 2005, the completion factors were calculated with
more emphasis placed on historical data derived from other
products since there was insufficient data related to the ACE
product rider to provide accurate and reliable completion
factors. Had these refinements been made at December 31,
2005, the claim liability estimate would have been reduced by
$19.1 million.
|
|
|
|
In the second quarter of 2006, the Company determined that
sufficient provision for large claims could be made within its
normal reserve process, eliminating the need for a
previously-established separate large claim reserve. This
refinement resulted in a reduction in the claim liability of
$10.8 million. Had this refinement been made at
December 31, 2005, the claim liability estimate would have
been reduced by $10.6 million.
|
2005
Change in Claim Liability Estimates
Results at the SEA Division in 2005 reflected an aggregate
benefit in the amount of $40.9 million attributable to
refinements of the Companys estimate for its claim
liability on its health insurance products. For financial
reporting purposes, each of these refinements is considered to
be a change in estimate, resulting from additional information
and subsequent developments from prior periods. Accordingly, the
financial impact of the refinements was accounted for in the
respective periods that the refinements occurred.
Results at the SEA Division for the year ended December 31,
2005 reflected a benefit in the amount of $33.3 million
recorded in the third quarter of 2005 attributable to a
refinement of the Companys estimate for its claim
liability on its health insurance products. The largest portion
of the adjustment (approximately $21.0 million) was
attributable to a refinement of the estimate of the unpaid claim
liability for the most recent incurral months. The Company
utilizes anticipated loss ratios to calculate the estimated
claim liability for the most recent incurral months. Despite
negligible premium rate increases implemented on its most
popular scheduled health insurance products, the SEA Division
has continued to observe favorable claims experience and, as a
result, loss ratios have
47
not increased as rapidly as anticipated. This favorable claims
experience has been reflected in the refinement of the
anticipated loss ratios used in estimating the unpaid claim
liability for the most recent incurral months. The remaining
portion of the adjustment to the claim liability (approximately
$12.3 million) was attributable to an update of the
completion factors used in the developmental method of
estimating the unpaid claim liability to reflect more current
claims administration practices.
In addition, effective January 1, 2005, the Companys
SEA Division made certain refinements to its claim liability
calculations related to the ACE rider, the effect of which
decreased claim liabilities and correspondingly increased
operating income in the amount of $7.6 million in the first
quarter of 2005. Prior to January 1, 2005, the SEA Division
utilized a technique that is commonly used to estimate claims
liabilities with respect to developing blocks of business, until
sufficient experience is obtained to allow more precise
estimates. The Company believed that the technique produced
appropriate reserve estimates in all prior periods. During the
first quarter of 2005, the Company believed that there were
sufficient claims paid on this benefit to produce a reserve
estimate utilizing the completion factor technique. As a result,
effective January 1, 2005, the SEA Division refined its
technique used to estimate claim liabilities to utilize
completion factors for older incurral dates. The technique
continues to utilize anticipated loss ratios in the most recent
incurral months. This completion factor technique utilized
historical data derived from other products since there was
insufficient data related to the ACE product rider to provide
accurate and reliable completion factors.
48
Quarterly
Results
The following table presents the information for each of the
Companys fiscal quarters in 2006 and 2005. This
information is unaudited and has been prepared on the same basis
as the audited Consolidated Financial Statements of the Company
included herein and, in managements opinion, reflects all
adjustments necessary for a fair presentation of the information
for the periods presented. The Company has elected to utilize
the one time special transition provisions of SAB 108 and
recorded an adjustment to retained earnings effective
January 1, 2006 to reflect this change in accounting policy
with respect to the capitalization and amortization of deferred
acquisition costs associated with excess first and second year
commissions. As of January 1, 2006, the change in
accounting policy resulted in an increase in the Companys
capitalized deferred acquisition cost (DAC) of
$77.6 million, a related increase to its deferred tax
liability by $27.1 million, and a net increase to
shareholders equity of $50.5 million. The adoption of
this new accounting policy had the effect of increasing reported
underwriting, policy acquisition costs and insurance expenses
(classified to its SEA Division) in 2006 by the amount of
$15.5 million and, correspondingly, reducing after-tax net
income by $10.1 million. The Company has reflected the
effects of this change in accounting policy for the 2006 interim
periods in the Quarterly Results table below. The
operating results for any quarter are not necessarily indicative
of results for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
|
|
|
|
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
555,305
|
|
|
$
|
562,568
|
|
|
$
|
515,543
|
|
|
$
|
513,155
|
|
|
$
|
515,744
|
|
|
$
|
520,174
|
|
|
$
|
545,908
|
|
|
$
|
539,392
|
|
Income from continuing operations
before federal income taxes
|
|
|
125,954
|
|
|
|
154,152
|
|
|
|
13,728
|
|
|
|
58,464
|
|
|
|
59,802
|
|
|
|
92,755
|
|
|
|
79,514
|
|
|
|
81,079
|
|
Income from continuing operations
|
|
|
82,168
|
|
|
|
89,874
|
|
|
|
5,680
|
|
|
|
38,846
|
|
|
|
37,498
|
|
|
|
60,672
|
|
|
|
52,142
|
|
|
|
52,658
|
|
Income (loss) from discontinued
operations
|
|
|
507
|
|
|
|
301
|
|
|
|
19,701
|
|
|
|
661
|
|
|
|
971
|
|
|
|
373
|
|
|
|
173
|
|
|
|
(986
|
)
|
Net income
|
|
$
|
82,675
|
|
|
$
|
90,175
|
|
|
$
|
25,381
|
|
|
$
|
39,507
|
|
|
$
|
38,469
|
|
|
$
|
61,045
|
|
|
$
|
52,315
|
|
|
$
|
51,672
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.75
|
|
|
$
|
3.01
|
|
|
$
|
0.17
|
|
|
$
|
0.84
|
|
|
$
|
0.81
|
|
|
$
|
1.31
|
|
|
$
|
1.13
|
|
|
$
|
1.14
|
|
Income (loss) from discontinued
operations
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.58
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.77
|
|
|
$
|
3.02
|
|
|
$
|
0.75
|
|
|
$
|
0.85
|
|
|
$
|
0.83
|
|
|
$
|
1.32
|
|
|
$
|
1.13
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.67
|
|
|
$
|
2.94
|
|
|
$
|
0.16
|
|
|
$
|
0.83
|
|
|
$
|
0.80
|
|
|
$
|
1.29
|
|
|
$
|
1.11
|
|
|
$
|
1.11
|
|
Income (loss) from discontinued
operations
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.57
|
|
|
|
0.01
|
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.69
|
|
|
$
|
2.95
|
|
|
$
|
0.73
|
|
|
$
|
0.84
|
|
|
$
|
0.82
|
|
|
$
|
1.30
|
|
|
$
|
1.11
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of earnings (loss) per share for each quarter is
made independently of earnings (loss) per share for the year.
49
Liquidity
and Capital Resources
Consolidated
On a consolidated level, the Companys primary sources of
liquidity have been premium revenues from policies issued,
investment income, fees and other income, proceeds from
corporate borrowings and borrowings to fund student loans. The
primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses, cash
dividends to shareholders, stock repurchases and the funding of
student loans. During 2006, the Company generated on a
consolidated basis net cash from operations in the amount of
$42.8 million, compared to net cash from operations of
$185.4 million in 2005 and $254.2 million in 2004. The
decrease in cash flow from operations in 2006 is due to the cash
used to transfer the net liabilities of the Student Insurance
Division and the Star HRG Division of $85.5 million. In
addition, income from continuing operations before tax,
excluding realized gains recorded on the sale of the Student
Insurance Division and the Star HRG Division, decreased
$162.6 million in 2006 from 2005.
The Companys consolidated short and long-term indebtedness
(exclusive of indebtedness secured by student loans) was
$556.1 million and $15.5 million at December 31,
2006 and 2005, respectively.
In connection with the Merger, the Company borrowed
$500.0 million under a term loan credit facility and issued
$100.0 million of Floating Rate Junior Subordinated Notes.
This indebtedness is more particularly described below:
|
|
|
|
|
In connection with the Merger completed on April 5, 2006,
HealthMarkets, LLC, a direct wholly-owned subsidiary of the
Company, 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, and the
proceeds thereof were used to fund a portion of the
consideration paid in the Merger. At December 31, 2006, the
Company had an aggregate of $437.5 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 (1.00%). The Company
has not drawn on the $75.0 million revolving credit
facility. During the six months ended December 31, 2006,
the Company made its regularly scheduled quarterly principal
payment in the amount of $2.5 million and a voluntary
prepayment in the amount of $60.0 million on the term loan
facility.
|
The revolving credit facility will mature on April 5, 2011,
and the term loan facility will mature on April 5, 2012.
The term loan required nominal quarterly installments (not
exceeding 0.25% of the aggregate principal amount at the date of
issuance) until the maturity date, at which time the remaining
principal amount is due. As a result of the $60.0 million
prepayment, the Company is not obligated to make future nominal
quarterly installments as previously required by the credit
agreement. Borrowings under the credit agreement may be subject
to certain mandatory prepayments. At HealthMarkets, LLCs
election, the interest rates per annum applicable to borrowings
under the credit agreement are based on a fluctuating rate of
interest measured by reference to either (a) LIBOR plus a
borrowing margin, or (b) a base rate plus a borrowing
margin. HealthMarkets, LLC will pay (a) fees on the unused
loan commitments of the lenders, (b) letter of credit
participation fees for all letters of credit issued, plus
fronting fees for the letter of credit issuing bank, and
(c) other customary fees in respect of the credit facility.
Borrowings and other obligations under the credit agreement are
secured by a pledge of HealthMarkets, LLCs interest in
substantially all of its subsidiaries, including the capital
stock of MEGA, Mid-West and Chesapeake.
|
|
|
|
|
On April 5, 2006, HealthMarkets Capital Trust I and
HealthMarkets Capital Trust II (two newly formed 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% through but excluding June 15, 2011
|
50
|
|
|
|
|
and thereafter at a floating rate equal to three-month LIBOR
plus 3.05%. Distributions on the Trust Securities will be
paid at the same interest rates paid on the Notes.
|
The Notes, which constitute the sole assets of the Trusts, are
subordinate and junior in right of payment to all senior
indebtedness (as defined in the Indentures) of HealthMarkets,
LLC. The Company has fully and unconditionally guaranteed the
payment by the Trusts of distributions and other amounts payable
under the Trust Securities. The guarantee is subordinated
to the same extent as the Notes. The Trusts are obligated to
redeem the Trust Securities when the Notes are paid at
maturity or upon any earlier prepayment of the Notes. Prior to
June 15, 2011, the Notes may be redeemed only upon the
occurrence of certain tax or regulatory events at 105.0% of the
principal amount thereof in the first year reducing by
1.25% per year until it reaches 100.0%. On and after
June 15, 2011 the Notes are redeemable, in whole or in
part, at the option of the Company at 100.0% of the principal
amount thereof.
On April 29, 2004, UICI Capital Trust I (a newly
formed 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, which date may be accelerated to a date not
earlier than April 29, 2009. The 2004 Notes may be prepaid
prior to April 29, 2009, at 107.5% of the principal amount
thereof, upon the occurrence of certain events, and thereafter
at 100.0% of the principal amount thereof. The 2004 Notes, which
constitute the sole assets of the 2004 Trust, are subordinate
and junior in right of payment to all senior indebtedness (as
defined in the Indenture, dated April 29, 2004, governing
the terms of the 2004 Notes) of the Company. The 2004 Notes
accrue interest at a floating rate equal to three-month LIBOR
plus 3.50%, payable quarterly on February 15, May 15,
August 15, and November 15 of each year. At
December 31, 2006, the 2004 Notes bore interest at an
annual rate of 8.87%. The quarterly distributions on the 2004
Trust Securities are paid at the same interest rate paid on
the 2004 Notes.
At December 31, 2006 and 2005, the Company had an aggregate
of $119.0 million and $130.9 million, respectively, of
indebtedness outstanding under a secured student loan credit
facility, which indebtedness is represented by Student
Loan Asset-Backed Notes (the SPE Notes) issued
by a bankruptcy-remote special purpose entity (the
SPE). At December 31, 2006 and 2005,
indebtedness outstanding under the secured student loan credit
facility was secured by alternative (i.e., non-federally
guaranteed) student loans and accrued interest in the carrying
amount of $111.2 million and $115.3 million,
respectively, and by a pledge of cash, cash equivalents and
other qualified investments in the amount of $14.2 million
and $20.5 million, respectively. At December 31, 2006,
$7.2 million of such cash, cash equivalents and other
qualified investments was available to fund the purchase from
the Company of additional student loans generated under the
Companys College First Alternative Loan program, which
purchases may be made in accordance with the terms of the
agreements governing the securitization until February 2007.
After February 1, 2007, the Company will fund loans with
cash on hand from HealthMarkets LLC.
All indebtedness issued under the secured student loan credit
facility is reflected as student loan indebtedness on the
Companys consolidated balance sheet; all such student
loans and accrued investment income pledged to secure such
facility are reflected as student loan assets and accrued
investment income, respectively, on the Companys
consolidated balance sheet; and all such cash, cash equivalents
and qualified investments specifically pledged under the student
loan credit facility are reflected as restricted cash on the
Companys consolidated balance sheet. 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. Accordingly, in connection with
the financing the Company has recorded and will in the future
record 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 and $50.0 million of
Series 2001A-2
Notes issued on April 27, 2001, and $50.0 million of
Series 2002A Notes issued on April 10, 2002). The
Series 2001A-1
Notes and
Series 2001A-2
Notes have a final stated maturity of July 1, 2036;
51
the Series 2002A Notes have a final stated maturity of
July 1, 2037. However, the SPE Notes are subject to
mandatory redemption in whole or in part (a) on the first
interest payment date which is at least 45 days after
February 1, 2007, from any monies then remaining on deposit
in the acquisition fund not used to purchase additional student
loans and (b) on the first interest payment date which is
at least 45 days after July 1, 2005, from any monies
then remaining on deposit in the acquisition fund 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. After July 1,
2005, the SPE Notes are 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
2006 and 2005 the Company made principal payments in the
aggregate amount of $11.9 million and $19.1 million,
respectively, on the Notes.
The SPE and the secured student loan facility were structured
with an expectation that interest and recoveries of principal to
be received with respect to the underlying student loans
securing payment of the SPE Notes would be sufficient to pay
principal of and interest on the SPE Notes when due, together
with operating expenses of the SPE. This expectation was based
upon analysis of cash flow projections, and assumptions
regarding the timing of the financing of the underlying student
loans to be held by the SPE, the future composition of and yield
on the financed student loan portfolio, the rate of return on
monies to be invested by the SPE in various funds and accounts
established under the indenture governing the SPE Notes, and the
occurrence of future events and conditions. There can be no
assurance, however, that the student loans will be financed as
anticipated, that interest and principal payments from the
financed student loans will be received as anticipated, that the
reinvestment rates assumed on the amounts in various funds and
accounts will be realized, or other payments will be received in
the amounts and at the times anticipated.
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 holding
company in this section). HealthMarkets LLCs
principal assets are its investment in its separate operating
subsidiaries, including its regulated insurance subsidiaries.
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 subsidiaries. The laws
governing the Companys insurance subsidiaries restrict
dividends paid by the Companys domestic insurance
subsidiaries in any year. Inability to access cash from its
subsidiaries could have a material adverse effect upon the
Companys liquidity and capital resources.
52
At December 31, 2006 and 2005, HealthMarkets, Inc. and
HealthMarkets LLC at the holding company level held cash and
cash equivalents in the amount of $311.5 million and
$151.4 million, respectively. Set forth below is a summary
statement of aggregate cash flows for HealthMarkets, Inc and
HealthMarkets LLC for each of the three most recent years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash and cash equivalents on hand
at beginning of year
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
$
|
37,840
|
|
Sources of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from domestic insurance
subsidiaries(1)
|
|
|
213,200
|
|
|
|
146,000
|
|
|
|
23,000
|
|
Dividends from offshore insurance
subsidiaries
|
|
|
6,950
|
|
|
|
9,000
|
|
|
|
5,290
|
|
Dividends from non-insurance
subsidiaries(2)
|
|
|
1,607
|
|
|
|
9,037
|
|
|
|
27,630
|
|
Debt proceeds(3)
|
|
|
600,000
|
|
|
|
|
|
|
|
14,570
|
|
Contribution by private equity
firms
|
|
|
985,000
|
|
|
|
|
|
|
|
|
|
Principal repayment on Star HRG
buyer note(4)
|
|
|
72,365
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior
secured notes by non-consolidated qualifying special purpose
entity(5)
|
|
|
71,929
|
|
|
|
|
|
|
|
|
|
Proceeds from other financing
activities(6)
|
|
|
27,870
|
|
|
|
12,253
|
|
|
|
26,587
|
|
Proceeds from stock option
activities
|
|
|
337
|
|
|
|
2,582
|
|
|
|
7,524
|
|
Net tax treaty payments from
subsidiaries
|
|
|
40,499
|
|
|
|
5,536
|
|
|
|
|
|
Net investment activities
|
|
|
3,221
|
|
|
|
1,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of cash
|
|
|
2,022,978
|
|
|
|
186,181
|
|
|
|
104,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses of cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash to operations
|
|
|
(34,172
|
)
|
|
|
(14,767
|
)
|
|
|
(17,948
|
)
|
Contributions/investment in
subsidiaries(7)
|
|
|
(635
|
)
|
|
|
(1,690
|
)
|
|
|
(2,506
|
)
|
Interest on debt
|
|
|
(23,808
|
)
|
|
|
(1,023
|
)
|
|
|
(993
|
)
|
Repayment of debt
|
|
|
(62,500
|
)
|
|
|
|
|
|
|
(18,951
|
)
|
Financing activities(8)
|
|
|
(150
|
)
|
|
|
(370
|
)
|
|
|
(2,856
|
)
|
Dividends paid to shareholders
|
|
|
|
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
Purchases of HealthMarkets common
stock(9)
|
|
|
(8,745
|
)
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
Net investment activities
|
|
|
|
|
|
|
|
|
|
|
(10,387
|
)
|
Net tax treaty net payments from
subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(1,530
|
)
|
Merger transaction costs(10)
|
|
|
(120,921
|
)
|
|
|
(8,417
|
)
|
|
|
|
|
Treasury stock purchase in
Merger(11)
|
|
|
(1,611,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uses of cash
|
|
|
(1,862,920
|
)
|
|
|
(74,331
|
)
|
|
|
(102,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents on hand
at end of year
|
|
$
|
311,481
|
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at
HealthMarkets, Inc.
|
|
$
|
48,578
|
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
Cash and cash equivalents at
HealthMarkets LLC
|
|
|
262,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents on hand
at end of year
|
|
$
|
311,481
|
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of dividends paid to the holding company by MEGA and
Mid-West. |
|
(2) |
|
Includes in 2004 $25.0 million of dividends from a
non-insurance subsidiary related to the sale of the remaining
uninsured student loans retained by the Company upon the sale of
AMS. |
|
(3) |
|
Includes in 2006 proceeds from the term loan facility in the
amount of $500 million and proceeds from the floating rate
Junior Subordinated Notes of $100 million. |
53
|
|
|
(4) |
|
Includes distribution from a special purpose subsidiary of the
principal payment received in 2006 in the amount of
$72.4 million on the $150.8 million promissory note
received in July 2006. See Notes C and L of Notes to
Consolidated Financial Statements. |
|
(5) |
|
Reflects net proceeds of issuance by a non-consolidated
qualifying special purpose subsidiary of $72.4 million
principal amount of senior secured notes, which notes are
secured by a pledge of the $150.8 million promissory note
received in July 2006. HealthMarkets LLC received the promissory
note as a non-cash dividend from its subsidiary, MEGA, and
subsequently assigned the note to the special purpose
subsidiary. See Notes C and L of Notes to
Consolidated Financial Statements. |
|
(6) |
|
Includes borrowings from
and/or
repayments on loans from subsidiaries in the amount of $800,000,
$358,000 and $3.9 million in 2006, 2005 and 2004,
respectively, proceeds from subsidiaries related to agent stock
plans in the amount of $20.4 million, $11.1 million
and $19.7 million in 2006, 2005 and 2004, respectively,
repayment on loans from non-affiliated companies of
$3.9 million, and proceeds from the sale of
Class A-1
common stock to officers and directors of $2.8 million in
2006. |
|
(7) |
|
Includes purchase of and investment in non-insurance
subsidiaries and funding of discontinued operations. |
|
(8) |
|
Includes advances to subsidiaries in the amount of $150,000,
$370,000 and $2.9 million in 2006, 2005, and 2004,
respectively. |
|
(9) |
|
Includes repurchase of HealthMarkets common stock under the
Companys stock repurchase program in the amount of $-0-
(-0- shares), $7.0 million (310,900 shares) and
$16.3 million (1,043,400 shares) in 2006, 2005 and
2004, respectively. Also includes in 2006, 2005 and 2004 the
amounts of $8.7 million, $6.4 million and
$19.9 million, respectively, representing repurchases of
HealthMarkets common stock for agent stock accumulation plans
and purchases from officers or employees of the Company. |
|
(10) |
|
Includes the costs associated with the acquisition of the
Company by a group of private equity investors. |
|
(11) |
|
Includes the repurchase of 43,567,252 shares of
HealthMarkets common stock at $37.00 per share in
connection with the Merger. |
Prior approval by insurance regulatory authorities is required
for the payment by a domestic insurance company of dividends
that exceed certain limitations based on statutory surplus and
net income. During 2007, the Companys domestic insurance
companies can pay, without prior approval of the regulatory
authorities, aggregate dividends in the ordinary course of
business to the holding company of approximately
$71.2 million. However, as it has done in the past, the
Company will assess the results of operations of the regulated
domestic insurance companies to determine the prudent dividend
capability of the subsidiaries, consistent with
HealthMarkets practice of maintaining risk-based capital
ratios at each of the Companys domestic insurance
subsidiaries significantly in excess of minimum requirements.
Sources
and Uses of Cash and Liquidity
During 2006, 2005 and 2004, the Companys cash and
liquidity at the holding company were positively impacted by the
following significant factors and developments:
|
|
|
|
|
During 2006, the Company received an aggregate of
$221.7 million in cash dividends from its subsidiaries,
compared to $164.0 million of cash dividends received in
2005.
|
|
|
|
During 2006, the Company received $10.4 million of
investment income on short-term investments and other invested
assets held at the holding company.
|
|
|
|
During 2006, the Company received a distribution from a special
purpose subsidiary of the cash principal payment in the amount
of $72.4 million on the $150.8 million promissory note
received in July 2006 as consideration for sale of assets
comprising the Companys Star HRG unit.
|
|
|
|
During 2006 the Company received net cash proceeds in the amount
of $71.9 million from the issuance by a non-consolidated
qualifying special purpose subsidiary of $72.4 million
principal amount of senior secured notes.
|
|
|
|
On April 5, 2006, the Company received $985.0 million
for the purchase of common stock by the group of private equity
firms in connection with the merger.
|
54
|
|
|
|
|
As described above, to finance the Merger the Company utilized
the proceeds of additional indebtedness incurred in April 2006
in the amount of $600.0 million, consisting of
$500.0 million under a term loan credit facility and
$100.0 million of Floating Rate Junior Subordinated Notes.
|
|
|
|
On March 31, 2004, the Company completed the sale of all of
the remaining uninsured student loan assets formerly held by the
Companys former Academic Management Services Corp.
subsidiary. The sale of the uninsured student loans generated
gross cash proceeds in the amount of approximately
$25.0 million.
|
|
|
|
In April 2004, the Company, through a newly formed Delaware
statutory business trust, generated net proceeds of
$14.6 million from the issuance in a private placement of
$15.0 million aggregate issuance amount of floating rate
trust preferred securities. See Note I of Notes to
Consolidated Financial Statements.
|
|
|
|
Effective November 1, 2004, the Company terminated a
$30.0 million bank credit facility that was otherwise
scheduled to mature in January 2005. At the time the facility
was terminated, the Company had no borrowings outstanding under
the facility.
|
During 2006, 2005 and 2004, the Companys principal uses of
cash and liquidity at the holding company were as follows:
|
|
|
|
|
During 2006 and 2005, the holding company expended significant
amounts of cash for expenses related to the Merger, of which
approximately $120.9 million was expended during 2006 and
approximately $8.4 million was expended during the fourth
quarter of 2005.
|
|
|
|
On April 5, 2006, the Company utilized $1.6 billion to
repurchase 43,567,252 shares of its common stock in the
Merger.
|
|
|
|
During 2006, the holding company paid interest and principal on
its $500.0 million term loan facility in the amount of
$16.4 million and $62.5 million, respectively. The
Companys $62.5 million repayment of principal on the
facility included a voluntary prepayment in the amount of
$60.0 million.
|
|
|
|
In April 2005, HealthMarkets utilized approximately
$7.0 million to repurchase 310,900 shares of its
common stock pursuant to its share repurchase program. During
2004, HealthMarkets utilized approximately $16.3 million to
repurchase 1,043,400 of its common stock pursuant to its share
repurchase program. Such amounts are reflected as
Purchases of HealthMarkets common stock in the table
above.
|
|
|
|
During 2005 and 2004, the Company paid aggregate dividends to
holders of its common stock in the amount of $34.7 million
and $11.5 million, respectively.. On August 18, 2004,
the Companys Board of Directors adopted a policy of
issuing a regular semi-annual cash dividend on shares of its
common stock. Dividends paid in 2005 also included a
$0.25 per share special dividend ($11.6 million in the
aggregate) paid in March 2005. Since the execution on
September 15, 2005 of a definitive agreement contemplating
the acquisition of the Company in a cash merger by a group of
private equity firms, the Company has not declared or paid
additional dividends on shares of its common stock.
|
|
|
|
In April 2004, the Company paid in full its outstanding 6%
convertible subordinated notes in the aggregate amount of
$15.0 million and accrued interest thereon to the date of
prepayment. The notes had been issued by the Company in November
2003 in full payment of all contingent consideration payable in
connection with HealthMarkets February 2002 acquisition of
Star HRG.
|
|
|
|
In June 2004, the Company paid in full the final payment due in
the amount of $4.0 million on its 8.75% Senior Notes
due June 2004, which the Company had issued in 1994 in the
original aggregate issuance amount of $27.7 million.
|
55
Contractual
Obligations and Off Balance Sheet Arrangements
Set forth below is a summary of the Companys contractual
obligations (on a consolidated basis) at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Corporate debt
|
|
$
|
556,070
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
556,070
|
|
Student loan credit facility(1)
|
|
|
118,950
|
|
|
|
18,050
|
|
|
|
28,550
|
|
|
|
25,450
|
|
|
|
46,900
|
|
Future policy benefits(2)
|
|
|
453,715
|
|
|
|
21,103
|
|
|
|
47,407
|
|
|
|
40,408
|
|
|
|
344,797
|
|
Claim liabilities(2)
|
|
|
517,132
|
|
|
|
418,412
|
|
|
|
90,069
|
|
|
|
5,176
|
|
|
|
3,475
|
|
Capital lease obligations
|
|
|
1,709
|
|
|
|
1,325
|
|
|
|
384
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
10,690
|
|
|
|
3,775
|
|
|
|
5,404
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,658,266
|
|
|
$
|
462,665
|
|
|
$
|
171,814
|
|
|
$
|
72,545
|
|
|
$
|
951,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All indebtedness issued under the secured student loan credit
facility represent obligations solely of the SPE and not of the
Company or any other subsidiary and is secured by student loans,
accrued investment income, cash, cash equivalents and qualified
investments. |
|
(2) |
|
The payments related to the future policy benefits and claim
liabilities reflected in the table above have been projected
utilizing assumptions based on the Companys historical
experience and anticipated future experience. |
The Companys off balance sheet arrangements consist of
commitments to fund student loans generated by its former
College Fund Life Division and letters of credit.
Through the Companys former College Fund Life
Division, the Company previously offered an interest-sensitive
whole life insurance product issued with a child term rider,
under which the Company committed to provide private student
loans to help fund the named childs higher education if
certain restrictions and qualifications are satisfied. At
December 31, 2006, the Company had outstanding commitments
to fund student loans under the College Fund Life Division
program for the years 2007 through 2025. Loans are limited to
the cost of school or prescribed maximums. These loans are
generally guaranteed as to principal and interest by a private
guarantee agency and are also collateralized by either the
related insurance policy or the co-signature of a parent or
guardian. The total student loan funding commitments for each of
the next five school years and thereafter, as well as the amount
the Company expects to be required to fund based on historical
utilization rates and policy lapse rates, are as follows as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Expected
|
|
|
|
Commitment
|
|
|
Funding
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
35,903
|
|
|
$
|
3,364
|
|
2008
|
|
|
30,427
|
|
|
|
2,913
|
|
2009
|
|
|
27,302
|
|
|
|
2,518
|
|
2010
|
|
|
28,758
|
|
|
|
2,246
|
|
2011
|
|
|
32,144
|
|
|
|
1,981
|
|
2012 and thereafter
|
|
|
115,276
|
|
|
|
3,826
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
269,810
|
|
|
$
|
16,848
|
|
|
|
|
|
|
|
|
|
|
Interest rates on the above commitments are principally variable
(prime plus 2%).
Through February 1, 2007, the Company has funded its
College Fund Life Division student loan commitments with
the proceeds of indebtedness issued by a bankruptcy-remote
special purpose entity (the SPE Notes). The
indenture governing the terms of the SPE Notes provided that the
proceeds of such SPE Notes could be used to fund
56
student loan commitments only until February 1, 2007, after
which any monies then remaining on deposit in the acquisition
fund created by the indenture not used to purchase additional
student loans are required to be used to redeem the SPE Notes.
After February 1, 2007, the Company will fund loans with
cash on hand from HealthMarkets LLC. During 2006, principal
payments on the Notes were made in the amount of
$12.0 million from the proceeds from the repayment on the
student loan receivables. See discussion above under the
caption Liquidity and Capital Resources
Consolidated and Note J of Notes to
Consolidated Financial Statements.
At each of December 31, 2006 and 2005, the Company had
$9.6 million and $5.2 million, respectively, of
letters of credit outstanding relating to its insurance
operations.
Investments
The Companys Investment Committee monitors the investment
portfolio of the Company and its subsidiaries. The Investment
Committee receives investment management services from external
professionals and from the Companys in-house investment
management team. The internal investment management team
monitors the performance of the external managers as well as
directly managing approximately 71% of the investment portfolio.
Investments are selected based upon the parameters established
in the Companys investment policies. Emphasis is given to
the selection of high quality, liquid securities that provide
current investment returns. Maturities or liquidity
characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be
consistent with the duration of the policy liabilities.
Consistent with regulatory requirements and internal guidelines,
the Company invests in a range of assets, but limits its
investments in certain classes of assets, and limits its
exposure to certain industries and to single issuers.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary.
Managements review considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific adverse conditions affecting a
particular investment; decline in fair value attributable to
specific conditions, such as conditions in an industry or in a
geographic area; decline in fair value for an extended period of
time; downgrades by rating agencies from investment grade to
non-investment grade; financial condition deterioration of the
issuer and situations where dividends have been reduced or
eliminated or scheduled interest payments have not been made.
Management monitors investments where two or more of the above
indicators exist. The Company also identifies investments in
economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of
determination.
Set forth below is a summary of the Companys investments
by category at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value
(cost: 2006 $1,391,275; 2005 $1,496,340)
|
|
$
|
1,374,403
|
|
|
|
76.3
|
%
|
|
$
|
1,484,465
|
|
|
|
83.5
|
%
|
Equity securities, at fair value
(cost: 2006 $283; 2005 $1,508)
|
|
|
318
|
|
|
|
0.3
|
%
|
|
|
1,347
|
|
|
|
0.1
|
%
|
Mortgage loans
|
|
|
|
|
|
|
0.0
|
%
|
|
|
751
|
|
|
|
0.0
|
%
|
Policy loans
|
|
|
14,625
|
|
|
|
0.8
|
%
|
|
|
16,325
|
|
|
|
0.9
|
%
|
Short-term and other investments
|
|
|
412,498
|
|
|
|
22.9
|
%
|
|
|
275,036
|
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,801,844
|
|
|
|
100.0
|
%
|
|
$
|
1,777,924
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
Fixed maturity securities represented 76.3% and 83.5% of the
Companys total investments at December 31, 2006 and
2005, respectively. Fixed maturity securities at
December 31, 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
73,283
|
|
|
|
5.3
|
%
|
Corporate bonds
|
|
|
912,577
|
|
|
|
66.4
|
%
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
225,400
|
|
|
|
16.4
|
%
|
Other mortgage and asset backed
securities
|
|
|
158,306
|
|
|
|
11.5
|
%
|
Other
|
|
|
4,837
|
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities
|
|
$
|
1,374,403
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Corporate bonds included in the fixed maturity portfolio consist
primarily of short term and medium term investment grade bonds.
The Companys investment policy with respect to
concentration risk limits individual investment grade bonds to
3% of assets and non-investment grade bonds to 2% of assets. The
policy also limits the investments in any one industry to 20% of
assets. As of December 31, 2006, the largest concentration
in any one investment grade corporate bond was
$94.8 million, which represented 5.3% of total invested
assets. This security was received as payment on the sale of the
Student Division. To limit its credit risk, the Company has
taken out $75.0 million of credit default insurance on this
bond, reducing its default exposure to $19.8 million, or
1.1% of total invested assets. The largest concentration in any
one non-investment grade corporate bond was $3.5 million,
which represented less than 1% of total invested assets. The
largest concentration to any one industry was less than 10%.
Included in the fixed maturity portfolio are mortgage-backed
securities, including collateralized mortgage obligations,
mortgage-backed pass-through certificates, and commercial
mortgage-backed securities. To limit its credit risk, the
Company invests in mortgage-backed securities that are rated
investment grade by the public rating agencies. The
Companys mortgage-backed securities portfolio is a
conservatively structured portfolio that is concentrated in the
less volatile tranches, such as planned amortization classes and
sequential classes. The Company seeks to minimize prepayment
risk during periods of declining interest rates and minimize
duration extension risk during periods of rising interest rates.
The Company has less than 1% of its investment portfolio
invested in the more volatile tranches.
As of December 31, 2006 and 2005, $1.356 billion or
(98.7%) and $1.457 billion (or 98.1%), respectively, of the
fixed maturity securities portfolio was rated BBB or better
(investment grade), and $18.2 million or (1.3%) and
$27.6 million (or 1.9%), respectively, of the fixed
maturity securities portfolio was invested in below investment
grade securities (rated less than BBB).
A quality distribution for fixed maturity securities at
December 31, 2006 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
Rating
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and AAA
|
|
$
|
593,601
|
|
|
|
43.2
|
%
|
AA
|
|
|
155,928
|
|
|
|
11.3
|
%
|
A
|
|
|
460,225
|
|
|
|
33.5
|
%
|
BBB
|
|
|
146,488
|
|
|
|
10.7
|
%
|
Less than BBB
|
|
|
18,161
|
|
|
|
1.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,374,403
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
58
The Company has classified its entire fixed maturity portfolio
as available for sale. This classification requires
the portfolio to be carried at fair value with the resulting
unrealized gains or losses, net of applicable income taxes,
reported in accumulated other comprehensive income as a separate
component of stockholders equity. As a result,
fluctuations in fair value, which is affected by changes in
interest rates, will result in increases or decreases to the
Companys stockholders equity.
During 2006, 2005 and 2004, the Company recorded impairment
charges for certain fixed and equity securities in the amount of
$2.4 million, $4.1 million and $3.6 million,
respectively.
Set forth below is a summary of the Companys gross
unrealized losses in its portfolio of fixed maturity securities
as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
20,353
|
|
|
$
|
75
|
|
|
$
|
36,149
|
|
|
$
|
651
|
|
|
$
|
56,502
|
|
|
$
|
726
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
26,399
|
|
|
|
143
|
|
|
|
179,551
|
|
|
|
4,667
|
|
|
|
205,950
|
|
|
|
4,810
|
|
Other mortgage and asset backed
securities
|
|
|
38,250
|
|
|
|
176
|
|
|
|
111,058
|
|
|
|
3,028
|
|
|
|
149,308
|
|
|
|
3,204
|
|
Corporate bonds
|
|
|
77,682
|
|
|
|
444
|
|
|
|
343,231
|
|
|
|
15,522
|
|
|
|
420,913
|
|
|
|
15,966
|
|
Other
|
|
|
4,837
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
4,837
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,521
|
|
|
$
|
3,000
|
|
|
$
|
669,989
|
|
|
$
|
23,868
|
|
|
$
|
837,510
|
|
|
$
|
26,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company had $26.9 million of
unrealized losses in its fixed maturities portfolio. Of the
$3.0 million in unrealized losses that have existed for
less than twelve months, all but a single security have
unrealized losses of less than 2% of cost. The single security
(which consists of the Companys residual interest in
Grapevine Finance LLC and which has been classified as
Other in the table above) had at December 31,
2006 an unrealized loss of $2.2 million, or 30.9% of cost.
See Notes C and L of Notes to Consolidated Financial
Statements. The Company believes that the cash flows received
from the security have not changed from those that were expected
when the securitization was completed in 2006. Of the
$23.9 million in unrealized losses that have existed for
twelve months or longer, eight securities had an unrealized loss
in excess of 10% of the securitys cost. The amount of
unrealized loss with respect to those securities was
$4.9 million at December 31, 2006. The Company
continually monitors these investments and believes that, as of
December 31, 2006, the unrealized loss in these investments
is temporary.
59
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
61,872
|
|
|
$
|
747
|
|
|
$
|
13,632
|
|
|
$
|
390
|
|
|
$
|
75,504
|
|
|
$
|
1,137
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
145,168
|
|
|
|
2,077
|
|
|
|
68,632
|
|
|
|
2,124
|
|
|
|
213,800
|
|
|
|
4,201
|
|
Other mortgage and asset backed
securities
|
|
|
67,635
|
|
|
|
947
|
|
|
|
78,020
|
|
|
|
2,618
|
|
|
|
145,655
|
|
|
|
3,565
|
|
Corporate bonds
|
|
|
380,079
|
|
|
|
7,642
|
|
|
|
260,044
|
|
|
|
10,180
|
|
|
|
640,123
|
|
|
|
17,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
654,754
|
|
|
$
|
11,413
|
|
|
$
|
420,328
|
|
|
$
|
15,312
|
|
|
$
|
1,075,082
|
|
|
$
|
26,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company regularly monitors its investment portfolio to
attempt to minimize its concentration of credit risk in any
single issuer. Set forth in the table below is a schedule of all
investments representing greater than 1% of the Companys
aggregate investment portfolio at December 31, 2006 and
2005, excluding investments in U.S. Government securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Issuer Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UnitedHealth Group(1)
|
|
$
|
94,763
|
|
|
|
5.3
|
%
|
|
$
|
|
|
|
|
|
%
|
Federal National Mortgage
Corporation
|
|
|
17,992
|
|
|
|
1.0
|
%
|
|
|
25,370
|
|
|
|
1.4
|
%
|
Issuer Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money
Market Fund(2)
|
|
$
|
325,677
|
|
|
|
18.1
|
%
|
|
$
|
200,900
|
|
|
|
11.3
|
%
|
|
|
|
(1) |
|
Represents security received from the purchaser as consideration
upon sale of the Companys former Student Insurance
Division on December 1, 2006. To reduce the Companys
credit risk, the Company has taken out $75.0 million of
credit default insurance on this security, reducing the
Companys default exposure to $19.8 million. See
Note C of Notes to Consolidated Financial Statements. |
|
(2) |
|
The Fidelity Institutional Money Market Fund is a diversified
institutional money market fund that invests solely in high
quality United States dollar denominated money market securities
of domestic and foreign issuers. |
Critical
Accounting Policies and Estimates
The Companys discussion and analysis of its financial
condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those
related to health and life insurance claims, bad debts,
investments, intangible assets, income taxes, financing
operations and contingencies and litigation. 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
60
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Claims
Liabilities
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
Consistent with overall company philosophy, the claim liability
estimate is determined which is expected to be adequate under
reasonably likely circumstances. This estimate is developed
using actuarial principles and assumptions that consider a
number of items as appropriate, including but not limited to
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. The Company does not develop ranges
in the setting of the claims liability reported in the financial
statements
The Companys claim liabilities are estimated using the
developmental method, which involves the use of completion
factors for most incurral months, supplemented with additional
estimation techniques, such as loss ratio estimates, in the most
recent incurral months. This method applies completion factors
to claim payments in order to estimate the ultimate amount of
the claim. These completion factors are derived from historical
experience and are dependent on the incurred dates of the claim
payments. The completion factors are selected so that they are
equally likely to be redundant as deficient.
For the majority of health insurance products offered through
the Self-Employed Agency Division, the Company establishes the
claims liability using the original incurred date. Under the
original incurred date methodology, claims liabilities for the
cost of all medical services related to the accident or sickness
are recorded at 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. A break in service of more than six
months will result in the establishment of a new incurred date
for subsequent services. A new incurred date will be established
if claims payments continue for more than thirty-six months
without a six month break in service.
In estimating the ultimate level of claims for the most recent
incurral months, the Company uses what it believes are prudent
estimates that reflect the uncertainty involved in these
incurral months. An extensive degree of judgment is used in this
estimation process. For healthcare costs payable, the claim
liability balances and the related benefit expenses are highly
sensitive to changes in the assumptions used in the claims
liability calculations. With respect to health claims, the items
that have the greatest impact on the Companys financial
results are the medical cost trend, which is the rate of
increase in healthcare costs, and the unpredictable variability
in actual experience. Any adjustments to prior period claim
liabilities are included in the benefit expense of the period in
which adjustments are identified. Due to the considerable
variability of healthcare costs and actual experience,
adjustments to health claim liabilities usually occur each
quarter and are sometimes significant.
The Company believes that its recorded claim liabilities are
reasonable and adequate to satisfy its ultimate claims
liability. Each of the Companys major operating units has
an actuarial staff that has primary responsibility for assessing
the claim liabilities. The Companys Corporate Risk
Management staff has an oversight process in place to provide
final review of the establishment of the claim liabilities. The
Company uses its own experience as appropriate and relies on
industry loss experience as necessary in areas where the
Companys data is limited. Our estimate of claim
liabilities represents managements best estimate of the
Companys liability as of December 31, 2006.
61
The completion factors and loss ratio estimates in the most
recent incurred months are the most significant factors
affecting the estimate of the claim liability. The Company
believes that the greatest potential for variability from
estimated results is likely to occur at its SEA Division. The
following table illustrates the sensitivity of these factors and
the estimated impact to the December 31, 2006 unpaid claim
liability for the SEA Division. The scenarios selected are
reasonable based on the Companys past experience, however
future results may differ.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Completion Factor(a)
|
|
|
Loss Ratio Estimate(b)
|
|
Increase
|
|
|
Increase (Decrease)
|
|
|
Increase
|
|
|
Increase (Decrease)
|
|
(Decrease)
|
|
|
in Estimated Claim
|
|
|
(Decrease)
|
|
|
in Estimated Claim
|
|
in Factor
|
|
|
Liability
|
|
|
in Ratio
|
|
|
Liability
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In thousands)
|
|
|
|
0.015
|
|
|
$
|
(28,638
|
)
|
|
|
6
|
|
|
$
|
35,379
|
|
|
0.010
|
|
|
|
(19,756
|
)
|
|
|
3
|
|
|
|
17,690
|
|
|
0.005
|
|
|
|
(10,054
|
)
|
|
|
(3
|
)
|
|
|
(17,690
|
)
|
|
(0.005
|
)
|
|
|
10,166
|
|
|
|
(6
|
)
|
|
|
(35,379
|
)
|
|
(0.010
|
)
|
|
|
20,446
|
|
|
|
(9
|
)
|
|
|
(53,069
|
)
|
|
(0.015
|
)
|
|
|
30,841
|
|
|
|
(12
|
)
|
|
|
(70,758
|
)
|
|
|
|
(a) |
|
Impact due to change in completion factors for incurred months
prior to the most recent five months. |
|
(b) |
|
Impact due to change in estimated loss ratio for the most recent
five months. |
The SEA Division also makes various refinements to the claim
liabilities as appropriate. These refinements estimate
liabilities for circumstances, such as an excess pending claims
inventory (i.e., inventories of pending claims in excess
of historical levels) and disputed claims. For example, the
Company closely monitors the level of claims that are pending.
When the level of pending claims appears to be in excess of
normal levels, the Company typically establishes a
liability for excess pending claims. The Company believes that
such an excess pending claims liability is
appropriate under such circumstances because of the operation of
the developmental method used by the Company to calculate the
principal claim liability, which method develops or
completes paid claims to estimate the claim
liability. When the pending claims inventory is higher than
would ordinarily be expected, the level of paid claims is
correspondingly lower than would ordinarily be expected. This
lower level of paid claims, in turn, results in the
developmental method yielding a smaller claim liability than
would have been yielded with a normal level of paid claims,
resulting in the need for an augmented claim liability.
With respect to business at its Disposed Operations, the Company
assigned incurred dates based on the date of service. This
definition estimated the liability for all medical services
received by the insured prior to the end of the applicable
financial period. Appropriate adjustments were made in the
completion factors to account for pending claim inventory
changes and contractual continuation of coverage beyond the end
of the financial period.
Set forth below is a summary of claim liabilities by business
unit at each of December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Self-Employed Agency Division
|
|
$
|
417,571
|
|
|
$
|
438,857
|
|
|
$
|
493,406
|
|
Life Insurance Division
|
|
|
11,472
|
|
|
|
10,989
|
|
|
|
12,072
|
|
Other Insurance
|
|
|
14,289
|
|
|
|
16,247
|
|
|
|
5,144
|
|
Disposed Operations(1)
|
|
|
1,218
|
|
|
|
79,908
|
|
|
|
100,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
444,550
|
|
|
|
546,001
|
|
|
|
610,779
|
|
Reinsurance recoverable(2)
|
|
|
72,582
|
|
|
|
12,105
|
|
|
|
11,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim liabilities
|
|
$
|
517,132
|
|
|
$
|
558,106
|
|
|
$
|
622,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects claims liabilities associated with the Companys
former Student Insurance Division and Star HRG Division. The
claims liabilities remaining at December 31, 2006 represent
the residual liability associated with a closed block short-term
product previously offered by, and retained by the Company in
the 2006 sale of, the Student Insurance Division. |
|
(2) |
|
Reflects liability related to unpaid losses recoverable. |
62
Activity in the claims liability is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Claims liability at beginning of
year
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
Less: Claims liability paid on
business disposed
|
|
|
(68,617
|
)
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,059,032
|
|
|
|
1,191,723
|
|
|
|
1,196,421
|
|
Prior years
|
|
|
(90,697
|
)
|
|
|
(124,996
|
)
|
|
|
(90,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses, net of
reinsurance
|
|
|
968,335
|
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for claims, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
664,220
|
|
|
|
765,767
|
|
|
|
714,361
|
|
Prior years
|
|
|
336,949
|
|
|
|
365,738
|
|
|
|
343,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid claims, net of
reinsurance
|
|
|
1,001,169
|
|
|
|
1,131,505
|
|
|
|
1,057,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability at end of year,
net of related reinsurance recoverable (2006
$72,582; 2005 $12,105; 2004 $11,808)
|
|
$
|
444,550
|
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
Liability Development Experience
The developmental method used by the Company to estimate most of
its claim liabilities produces a single estimate of reserves for
both in course of settlement (ICOS) and incurred but not
reported (IBNR) claims on an integrated basis. Since the IBNR
portion of the claim liability represents claims that have not
been reported to the Company, this portion of the liability is
inherently more imprecise and difficult to estimate than other
liabilities. A separate IBNR or ICOS reserve is estimated from
the combined reserve by allocating a portion of the combined
reserve based on historical payment patterns. Approximately
83-85% of
the Companys claim liabilities represent IBNR claims.
Set forth in the table below is the summary of the incurred but
not reported claim liability by business unit at each of
December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Self Employed Agency Division
|
|
$
|
346,060
|
|
|
$
|
368,556
|
|
|
$
|
416,299
|
|
Student Insurance Division
|
|
|
1,182
|
|
|
|
59,957
|
|
|
|
79,766
|
|
Star HRG Division
|
|
|
|
|
|
|
15,852
|
|
|
|
15,286
|
|
Life Insurance Division
|
|
|
4,254
|
|
|
|
4,725
|
|
|
|
5,546
|
|
Other Insurance
|
|
|
14,177
|
|
|
|
16,007
|
|
|
|
4,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
365,673
|
|
|
|
465,097
|
|
|
|
521,833
|
|
Reinsurance recoverable
|
|
|
65,341
|
|
|
|
7,971
|
|
|
|
8,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total IBNR claim liability
|
|
|
431,014
|
|
|
|
473,068
|
|
|
|
530,422
|
|
ICOS claim liability
|
|
|
78,877
|
|
|
|
80,904
|
|
|
|
88,946
|
|
Reinsurance recoverable
|
|
|
7,241
|
|
|
|
4,134
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ICOS claim liability
|
|
|
86,118
|
|
|
|
85,038
|
|
|
|
92,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim liability
|
|
$
|
517,132
|
|
|
$
|
558,106
|
|
|
$
|
662,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of IBNR to Total
|
|
|
83
|
%
|
|
|
85
|
%
|
|
|
85
|
%
|
63
Over time, the developmental method replaces anticipated
experience with actual experience, resulting in an ongoing
re-estimation of the claims liability. Since the greatest degree
of estimation is used for more recent periods, the most recent
prior year is subject to the greatest change.
Set forth in the table below is a summary of the claims
liability development experience (favorable) unfavorable by
business unit in the Companys Insurance segment for each
of the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Self-Employed Agency Division
|
|
$
|
(85,784
|
)
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
Life Insurance Division
|
|
|
(510
|
)
|
|
|
337
|
|
|
|
(926
|
)
|
Other Insurance
|
|
|
(2,530
|
)
|
|
|
805
|
|
|
|
1
|
|
Disposed Operations
|
|
|
(1,873
|
)
|
|
|
(4,776
|
)
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total favorable
|
|
$
|
(90,697
|
)
|
|
$
|
(124,996
|
)
|
|
$
|
(90,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on SEA Division. As indicated in the
table above, incurred losses developed at the SEA Division in
amounts less than originally anticipated due to
better-than-expected
experience on the health business in the SEA Division in each of
2006, 2005 and 2004. For the SEA Division, the (favorable)
unfavorable claims liability development experience in the prior
years reserve for each of the years ended
December 31, 2006, 2005 and 2004 is set forth in the table
below by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Development in the most recent
incurral months
|
|
$
|
(35,504
|
)
|
|
$
|
(72,728
|
)
|
|
$
|
(42,947
|
)
|
Development in completion factors
|
|
|
(6,612
|
)
|
|
|
(21,095
|
)
|
|
|
(7,664
|
)
|
Development in large claim reserve
|
|
|
(10,555
|
)
|
|
|
(8,455
|
)
|
|
|
(5,425
|
)
|
Development in reserves for
regulatory and legal matters
|
|
|
(4,762
|
)
|
|
|
(6,971
|
)
|
|
|
18,906
|
|
Change in estimate for ACE rider
|
|
|
(24,165
|
)
|
|
|
(7,613
|
)
|
|
|
|
|
Other change in estimate as
disclosed below
|
|
|
|
|
|
|
|
|
|
|
(47,794
|
)
|
Other
|
|
|
(4,186
|
)
|
|
|
(4,500
|
)
|
|
|
(6,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (redundancy) inadequacy
|
|
$
|
(85,784
|
)
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As indicated in the table above, considerable redundancies in
each year are associated with the estimate of claim liabilities
for the most recent incurral months. The Company has limited
data with respect to these most recent incurral months and,
accordingly, estimates are based primarily on anticipated
experience, taking into account the impact of the Companys
rate changes relative to expected medical trend. Since late
2003, the Company has severely reduced the level of rate
increases on its underlying scheduled health insurance coverage
in response to experience that has been more favorable than was
assumed in the establishment of the premium rates. This
favorable experience first appeared in incurred months in the
latter half of 2002, which with hindsight proved to be much more
favorable than prior experience would have suggested. At the end
of 2003 and again at the end of 2004, there appeared to be
evidence that loss ratios on these products were increasing
again toward the anticipated levels, though hindsight eventually
showed that much of this deterioration was the result of the
redundancy that had developed in the completion factors, which
were adjusted in the third quarter of 2005. Accordingly, the
estimated claim liabilities assumed experience had deteriorated
as medical trend rates exceeded actual rate increases. In
hindsight, actual results were unusually favorable in each case.
In the third quarter of 2005, claim liability estimates were
adjusted to reflect this unusually favorable experience.
Additional adjustments were made in the third quarter of 2006 to
reflect this continuing favorable experience.
The total favorable claims liability development experience for
2006 in the amount of $85.8 million represented 19.5% of
total claim liabilities established for the SEA Division at
December 31, 2005. Most of
64
the redundancy ($35.5 million, excluding a refinement to
the claim liability for the ACE rider described below) is
attributable to experience in the most recent incurral months
developing more favorably than anticipated. The Company also
experienced a redundancy attributable to the completion factors
utilized of $6.6 million (excluding the refinements in the
ACE completion factors in the third and fourth quarters of 2006
described below) as the result of claims developing in amounts
less than anticipated by the completion factors used at
December 31, 2005. Furthermore, the SEA Division also
benefited from a reduction in the claim liability of
$10.8 million in its reserve for large claims as a result
of a change in estimate recorded in the second quarter of 2006,
of which $10.6 million was attributable to prior years. In
addition, the Company experienced favorable development of
approximately $4.8 million associated with its reserves for
regulatory and legal matters due to settlements of certain
litigation and matters on terms more favorable than originally
anticipated. In 2006, the Company made certain refinements to
its estimate of the claim liability for the ACE rider which
contributed to the favorable claims liability development
experience for the year, including revisions to the completion
factors utilized in computing this reserve as well as revisions
to the estimate of the unpaid claim liability for the most
recent incurral months. The impact of these refinements on the
development of the claim liabilities established at
December 31, 2005 is $24.2 million, including
$19.1 million attributable to the revised completion
factors and $5.1 million attributable to the estimate in
the most recent incurral months. The remaining favorable
experience in 2006 in the claims liability attributable to other
issues was $4.2 million, or 1.0% of total claim liabilities
established for the SEA Division at December 31, 2005.
The total favorable claims liability development experience for
2005 in the amount of $121.4 million represented 24.6% of
total claim liabilities established for the SEA Division at
December 31, 2004. The favorable claims liability
development experience in 2005 reflected a benefit of
$33.3 million recorded in the third quarter of 2005
attributable to a refinement of the Companys estimate for
its claim liability on its health insurance products, which
adjustment resulted from a refinement of the estimate of the
unpaid claim liability for the most recent incurral months
($20.9 million, included in the table above as part of the
development in the most recent incurral months) and an update of
the completion factors used in the developmental method of
estimating the unpaid claim liability to reflect more current
claims administration practices ($12.3 million, included in
the table above as part of the development in the completion
factors). The favorable claims liability development experience
at the SEA Division in 2005 also reflected the effects of a
favorable adjustment in the amount of $7.6 million recorded
in the first quarter of 2005 attributable to a refinement of an
estimate for the Companys claim liability established with
respect to the ACE (accumulated covered expense) rider that
provides for catastrophic coverage on the SEA Divisions
scheduled health insurance products. Excluding the impact of the
refinements discussed above, the remaining favorable experience
in 2005 in the claims liability was $80.5 million, or 16.3%
of total claim liabilities established for the SEA Division at
December 31, 2004. Most of the remaining redundancy
($51.8 million in addition to the refinement described
above) is attributable to experience in the five most recent
incurral months developing more favorably than anticipated (as
discussed above) and unanticipated improvements on certain
closed blocks that appeared to have been deteriorating based on
experience available at the end of 2004. The Company experienced
an additional redundancy in the completion factors of
$8.8 million (in addition to the redundancy from the
refinement previously described in the third quarter of
2005) as the result of claims developing in amounts less
than anticipated by the completion factors used at
December 31, 2004. The Company also experienced favorable
development of $8.5 million in its reserve for large claims
as a result of lower frequency and severity of large claims than
anticipated. In addition, the Company experienced favorable
development of approximately $7.0 million associated with
its reserves for regulatory and legal matters due to settlements
of certain matters on terms more favorable than originally
anticipated.
The total favorable claims liability development experience for
2004 in the amount of $91.7 million represented 20.2% of
total claim liabilities established for the SEA Division at
December 31, 2003. The favorable claims liability
development experience at the SEA Division in 2004 reflected the
effect of $47.8 million in claim liabilities established
during 2003 in response to a rapid pay down during 2003 of an
excess pending claims inventory. In particular, during 2003 the
Company observed a change in the distribution of paid claims by
incurred date; more paid claims were assigned to recent incurred
dates than had been the case on paid claims in prior years.
Assignment of paid claims with more recent incurred dates
typically results in an understatement of the claim development
liability, resulting in the need for augmented claim
liabilities. The Company believes that the deviation from
historical experience in incurred date assignment was a natural
consequence of the effort required to reduce a claims backlog,
which the Company was experiencing at the SEA Division during
the course of 2003. However, as
65
the actual claims experience developed in 2004, these augmented
claim liabilities in the amount of $47.8 million proved to
be redundant. These claim liabilities were released during 2004
and, as a result, did not influence the level of claim
liabilities redundancies in 2005 and will not influence the
level of claim liabilities redundancies in future periods.
Excluding the impact of the augmented claim liabilities
established at December 31, 2003 in response to the rapid
pay down during 2003 of an excess pending claims inventory, the
favorable experience in 2004 in the claims liability was
$43.9 million, or 9.6% of total claim liabilities
established for the SEA Division at December 31, 2003. Of
the remaining redundancy, $42.9 million was attributable to
experience in the five most recent incurral months developing
more favorably than anticipated as a result of unanticipated
improvements in the experience on products that had been showing
indications of deterioration in response to a reduction in the
level of rate increases. The Company experienced an additional
favorable development in the completion factors of
$7.7 million as a result of lower than expected claim
payments. The Company also experienced favorable development of
$5.4 million in its reserve for large claims as a result of
lower frequency and severity of large claims than anticipated.
In addition, the Company experienced unfavorable development of
nearly $18.9 million associated with its reserves for
regulatory and legal matters as the result of certain claim
litigation and the establishment of additional reserves in
response to claim payment issues raised in a market conduct
examination.
Over time, the developmental method replaces anticipated
experience with actual experience, resulting in an ongoing
re-estimation of the claims liability. Since the greatest degree
of estimation is used for more recent periods, the most recent
prior year is subject to the greatest change. Recent actual
experience has produced lower levels of claims payment
experience than originally expected.
In response to the redundancies reflected in 2004 and 2005, the
Company elected in the third quarter of 2005 for the SEA
Division to modify the assumptions used in the most recent
incurral months to rely less on loss ratios assumed in the
establishment of premium rates and more on historical
experience, reducing the claim liability estimate in the most
recent incurral months by $20.9 million. In addition, in
response to observed changes in the pattern of claim payments,
the Company elected in the third quarter of 2005 to update the
completion factors used in the developmental method to estimate
the claim liabilities at the SEA Division in a manner designed
to produce new completion factors that were anticipated to be
equally likely to be redundant as deficient. As a result of the
new completion factors, the claims liability estimate was
reduced by $12.3 million. These two adjustments in 2005
resulted in an aggregate reduction in the claim liability
estimate in the amount of $33.3 million.
Impact on Life Insurance Division. The varied
claim liability development experience at the Life Insurance
Division for each of the years presented is due to the
development of a closed block of workers compensation
business. The Life Insurance Division previously wrote
workers compensation insurance and similar group accident
coverage for employers in a limited geographical market. In May
2001, the Company made the decision to terminate this operation,
and all existing policies were terminated as the policies came
up for renewal over the succeeding twelve months. The closing of
new and renewal business starting in July of 2001 had the effect
of concentrating the claims experience into existing policies
and eliminating any benefits that might accrue from improved
underwriting of new business or liabilities released on newer
claims that might settle more quickly. The effect of closing a
block of this type of business is difficult to estimate at the
date of closing, due to the longer claims tail usually
experienced with workers compensation coverage, the tendency of
claims to concentrate in severity but without an associated
degree of predictability as the number of cases decreases, and
the unpredictable costs of protracted litigation often
associated with the adjudication of claims under workers
compensation policies.
Impact on Other Insurance. Through our
82.5%-owned subsidiary, ZON Re USA LLC (ZON Re), we
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. The favorable claim liability experience of
$2.5 million in 2006 is due to the release of reserves held
at December 31, 2005 for catastrophic excess of loss
contracts expiring during 2006. The unfavorable claim liability
development experience at ZON Re in 2005 in the amount of
$805,000 was due to certain large claims reported in 2005
associated with claims incurred in the prior year.
Impact on Disposed Operations. The products of
the Student Insurance and Star HRG Divisions consisted
principally of medical insurance. In general, medical insurance
business, for which incurred dates are assigned
66
based on date of service, has a short tail, which
means that a favorable development or unfavorable development
shown for prior years relates primarily to actual experience in
the most recent prior year.
The favorable claim liability development experience at the
Student Insurance Division in 2006 and 2005 was $478,000 and
$5.2 million, respectively. This favorable development is
due to claims in the current year developing more favorably than
indicated by the loss trends used to determine the claim
liability at December 31 of the preceding year. The
unfavorable claims liability development experience in 2004 in
the amount of $4.7 million reflects the effects of a delay
in processing of prior-year claims and
higher-than-expected
claim experience associated with the business written for the
2003-2004
school year.
The favorable claims liability development experience at Star
HRG Division of $1.4 million in 2006 includes the effects
of claims in 2006 developing more favorably than indicated by
the loss trends in 2005 used to determine the claim liability at
December 31, 2005. The unfavorable claim liability
development at the Star HRG Division in 2005 of $410,000 is
within the normal statistical variation in the model used to
develop the reserve. The actual development of prior years
claims exceeded the expected development of the claims
liability. The favorable claims liability development experience
of $3.0 million in 2004 includes the effects of claims in
2004 developing more favorably than indicated by the loss trends
in 2003 used to determine the claim liability at
December 31, 2003.
Accounting
for Policy Acquisition Costs
Health
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its health insurance
policies, including underwriting and policy issuance costs,
costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to
agents). The Company defers those costs that vary with
production. The Company generally defers commissions paid to
agents and premium taxes with respect to the portion of health
premium collected but not yet earned and the Company amortizes
the deferred expense over the period as and when the premium is
earned. Costs associated with generating sales leads with
respect to the health business issued through the SEA Division
are capitalized and amortized over a two-year period, which
approximates the average life of a policy. For financial
reporting purposes, other underwriting and policy issuance costs
(which the Company estimates are more fixed than variable) with
respect to health policies issued through the Companys SEA
and Other Insurance division are expensed as incurred.
At December 31, 2006, the Company changed its accounting
policy, effective January 1, 2006 with respect to the
amortization of a portion of deferred acquisition costs
associated with commissions paid to agents. Generally, the first
year and second year commission rates on policies issued by the
Companys SEA Division are higher than renewal year
commission rates. Commencing in 2006, the Company changed its
accounting methodology with respect to the first year and second
year excess commissions and now amortizes those excess
commissions over a two year period (based on recent persistency
studies showing that SEA policies have an average life of
2.09 years) rather than expensing the excess commissions in
the period the commissions were paid. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations 2006 Change
in Accounting Policy.
Life
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its life insurance policies,
including underwriting and policy issuance costs. The Company
defers those costs that vary with production. The Company
capitalizes commission and issue costs primarily associated with
the new business of its Life Insurance Division. Deferred
acquisition costs consist primarily of sales commissions and
other underwriting costs of new life insurance sales. Policy
acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying
period of the related policies, in proportion to the ratio of
the annual premium revenue to the total premium revenue
anticipated. Such anticipated premium revenue, which is modified
to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For
universal life-type and annuity contracts, capitalized costs are
amortized at a constant rate based on the present value of the
estimated gross profits expected to be realized on the book of
contracts.
67
Other
The cost of business acquired through acquisition of
subsidiaries or blocks of business is determined based upon
estimates of the future profits inherent in the business
acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income
is considered in determining whether a premium deficiency
exists. The amortization period is adjusted when estimates of
current or future gross profits to be realized from a group of
products are revised.
The Company monitors and assesses the recoverability of deferred
health and life policy acquisition costs on a quarterly basis.
Goodwill
and Other Identifiable Intangible Assets
The Company accounts for goodwill and other intangible assets
under Financial Accounting Standards Board Statement 142,
Goodwill and Other Intangible Assets. Statement 142
requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Statement 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment. The
Company has determined that it will review goodwill and other
intangible assets for impairment as of November 1 of each
year or more frequently if certain indicators arise. An
impairment loss would be recorded in the period such
determination was made. Following the Companys annual
review in 2006 for impairment of the goodwill and other
intangible assets related to continuing operations, the Company
recorded an impairment charge in the amount of $496,000 related
to the HealthMarket customer list acquired in October 2004.
See Note F of Notes to Consolidated Financial
Statements.
Accounting
for Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with UGA Association
Field Services, New United Agency and Cornerstone America. The
Company has established a liability for future unvested benefits
under the Agent Plans and adjusts the liability based on the
fair value of the Companys Common Stock. The accounting
treatment of the Companys Agent Plans has resulted and
will continue to result in unpredictable stock-based
compensation charges, dependent upon fluctuations in the fair
value of HealthMarkets
Class A-2
common stock. These unpredictable fluctuations in stock based
compensation charges may result in material non-cash
fluctuations in the Companys results of operations.
See discussion above under the caption Variable
Stock-Based Compensation and Note Q of Notes to
Consolidated Financial Statements.
Investments
The Company has classified its investments in securities with
fixed maturities as available for sale. Investments in equity
securities and securities with fixed maturities have been
recorded at fair value, and unrealized investment gains and
losses are reflected in stockholders equity. Investment
income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed
quarterly to determine if they have suffered an impairment of
value that is considered other than temporary. If investments
are determined to be impaired, a loss is recognized at the date
of determination.
Testing for impairment of investments also requires significant
management judgment. The identification of potentially impaired
investments, the determination of their fair value and the
assessment of whether any decline in value is other than
temporary are the key judgment elements. The discovery of new
information and the passage of time can significantly change
these judgments. Revisions of impairment judgments are made when
new information becomes known, and any resulting impairments are
made at that time. The economic environment and volatility of
securities markets increase the difficulty of determining fair
value and assessing investment impairment. The same influences
tend to increase the risk of potentially impaired assets.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary.
Managements review considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific
68
adverse conditions affecting a particular investment; decline in
fair value attributable to specific conditions, such as
conditions in an industry or in a geographic area; decline in
fair value for an extended period of time; downgrades by rating
agencies from investment grade to non-investment grade;
financial condition of the issuer deterioration and situations
where dividends have been reduced or eliminated or scheduled
interest payments have not been made. Management monitors
investments where two or more of the above indicators exist. The
Company also identifies investments in economically challenged
industries. If investments are determined to be impaired, a loss
is recognized at the date of determination.
The Company seeks to match the cash flows of invested assets
with the payment of expected liabilities. By doing this, the
Company attempts to make cash available as payments become due.
If a significant mismatch of the maturities of assets and
liabilities were to occur, the impact on the Companys
results of operations could be significant.
Non-Consolidated
Subsidiary
On August 3, 2006, Grapevine Finance LLC
(Grapevine) was incorporated in the State of
Delaware as a wholly owned subsidiary of HealthMarkets, LLC. On
August 16, 2006, the Company distributed and assigned to
Grapevine the $150.8 million promissory note (CIGNA
Note) and related Guaranty Agreement issued by Connecticut
General Corporation in the Star HRG sale transaction (see
Note C of Notes to Consolidated Financial Statements).
On August 16, 2006, Grapevine issued $72.4 million of
its senior secured notes to an institutional purchaser
collateralized by Grapevines assets including the CIGNA
Note. The net proceeds from the senior secured notes were
distributed to HealthMarkets, LLC
Grapevine is a non-consolidated qualifying special purpose
entity as defined in FASB 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. As a qualifying special purpose entity,
HealthMarkets does not consolidate the financial results of
Grapevine and accounts for its residual interest in Grapevine as
an investment in fixed maturity securities pursuant to
EITF 99-20,
Recognition of Interest Income and Impairment on Purchase and
Retained Beneficial Interests in Securitized Financial
Assets.
The Company measures the fair value of its residual interest in
Grapevine using a present value model incorporating the
following two key economic assumptions: (1) the timing of
the collections of interest on the CIGNA Note, payments of
interest expense on the senior secured notes and payment of
other administrative expenses and (2) an assumed discount
rate equal to the 15 year swap rate.
Deferred
Taxes
The Company records deferred tax assets to reflect the impact of
temporary differences between the financial statement carrying
amounts and tax bases of assets. Realization of the net deferred
tax asset is dependent on generating sufficient future taxable
income. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward
period are reduced.
The Company establishes a valuation allowance when management
believes, based on the weight of the available evidence, that it
is more likely than not that some portion of the deferred tax
asset will not be realized. The Company considers future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the continued need for a recorded valuation
allowance. Establishing or increasing the valuation allowance
would result in a charge to income in the period such
determination was made. In the event the Company were to
determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in
the period such determination was made.
Beginning in 2003, the Company realized net capital losses that
were carried forward and available to offset future capital
gains, if any, realized in the following five years. The Company
determined in 2003 that it likely would not generate sufficient
capital gains to realize the deferred tax benefits of the
capital loss carryforwards and certain investment impairment
losses realized in 2003. Management did not in 2003 anticipate
selling appreciated assets to generate capital gains (and impair
future investment return) solely for the purpose of utilizing
the capital loss carryover. Accordingly, the Company did not
recognize the tax benefits of these 2003 losses but, rather
established a valuation allowance during 2003. The sales of the
Student Insurance and the Star HRG divisions during 2006,
however, generated capital gains in excess of the capital loss
carryover and the investment impairment
69
losses. Accordingly, during 2006 the Company released the
valuation allowance of $18.1 million established in 2003,
thereby realizing the deferred tax benefits of the capital loss
carryforwards generated in 2003.
Loss
Contingencies
The Company is subject to proceedings and lawsuits related to
insurance claims and other matters. See Note P of
Notes to Consolidated Financial Statements. The Company is
required to assess the likelihood of any adverse judgments or
outcomes to these matters, as well as potential ranges of
probable losses. A determination of the amount of accruals
required, if any, for these contingencies is made after careful
analysis of each individual issue. The required accruals may
change in the future due to new developments in each matter or
changes in approach, such as a change in settlement strategy in
dealing with these matters.
Privacy
Initiatives
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 governing the use and security of individuals
nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the
Companys business and future results of operations. See
Business Regulatory and Legislative
Matters.
Other
Matters
The state of domicile of each of the Companys domestic
insurance subsidiaries imposes minimum risk-based capital
requirements that were developed by the NAIC. The formulas for
determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances and
premium levels based on the perceived degree of risk. Regulatory
compliance is determined by a ratio of a companys
regulatory total adjusted capital, as defined, to its authorized
control level risk-based capital, as defined. Companies
specific trigger points or ratios are classified within certain
levels, each of which requires specified corrective action. At
December 31, 2006, the risk-based capital ratio of each of
the Companys domestic insurance subsidiaries significantly
exceeded the ratios for which regulatory corrective action would
be required.
Dividends paid by domestic insurance companies out of earned
surplus in any year are limited by the law of the state of
domicile. See Item 5 Market for
Registrants Common Stock and Related Stockholder Matters
and Note N of Notes to Consolidated Financial Statements.
Inflation
Inflation historically has had a significant impact on the
health insurance business. In recent years, inflation in the
costs of medical care covered by such insurance has exceeded the
general rate of inflation. Under basic hospital medical
insurance coverage, established ceilings for covered expenses
limit the impact of inflation on the amount of claims paid.
Under catastrophic hospital expense plans and preferred provider
contracts, covered expenses are generally limited only by a
maximum lifetime benefit and a maximum lifetime benefit per
accident or sickness. Thus, inflation may have a significantly
greater impact on the amount of claims paid under catastrophic
hospital expense and preferred provider plans as compared to
claims under basic hospital medical coverage. As a result,
trends in healthcare costs must be monitored and rates adjusted
accordingly. Under the health insurance policies issued in the
self-employed market, the primary insurer generally has the
right to increase rates upon
30-60 days
written notice and subject to regulatory approval in some cases.
The annuity and universal life-type policies issued directly and
assumed by the Company are significantly impacted by inflation.
Interest rates affect the amount of interest that existing
policyholders expect to have credited to their policies.
However, the Company believes that the annuity and universal
life-type policies are generally competitive with those offered
by other insurance companies of similar size, and the investment
portfolio is managed to minimize the effects of inflation.
70
Recently
Issued Accounting Pronouncements
In September 2006, the Securities and Exchange Commission Staff
issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108, in an effort to address
diversity in the accounting practice of quantifying
misstatements and the potential for improper amounts on the
balance sheet. Prior to the issuance of SAB 108, the two
methods used for quantifying the effects of financial statement
errors were the roll-over and iron
curtain methods. Under the roll-over
method, the primary focus is the income statement, including
the reversing effect of prior year misstatements. The criticism
of this method is that misstatements can accumulate on the
balance sheet. On the other hand, the iron
curtain method focuses on the effect of correcting the
ending balance sheet, with less importance on the reversing
effects of prior year errors in the income statement.
SAB 108 establishes a dual approach,
which requires the quantification of the effect of financial
statement errors on each financial statement, as well as related
disclosures. Public companies are required to record the
cumulative effect of initially adopting the dual
approach method in the first year ending after
November 16, 2006 by recording any necessary corrections to
asset and liability balances with an offsetting adjustment to
the opening balance of retained earnings. The use of this
cumulative effect transition method also requires detailed
disclosures of the nature and amount of each error being
corrected and how and when they arose. The Company adopted
SAB 108 in the fourth quarter of 2006 and applied the
provisions of SAB 108 in connection with the change in
accounting policy with respect to the capitalization and
amortization of excess first and second year commissions
associated with the business of the Companys SEA Division.
See Managements Discussion and Analysis of
Financial Condition and Results of Operations -
2006 Change in Accounting Policy. The adoption of
SAB 108 did not have a material impact on the
Companys financial position, results of operations or cash
flows.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement 157 Fair Value
Measurements, which defines fair value as the price that
would be received to sell an asset or that would be paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes
a framework for measuring fair value and expands disclosures
about fair value measurements. Statement 157 will be
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company believes this statement
will not have a material effect upon the financial condition or
results of operations of the Company.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48) Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
Accounting for Income Taxes. FIN 48 prescribes a
threshold for the financial statement recognition of tax
benefits from tax positions taken or to be taken in an income
tax return. For tax benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by
taxing authorities. The amount of a tax benefit recognized is
the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate
settlement of the tax position. Required disclosures will
include a tabular rollforward of the tax benefits that have not
been recognized in the financial statements. The cumulative
effect, if any, of adopting FIN 48 is to be recorded as an
adjustment to retained earnings at the beginning of the period
of adoption. FIN 48 is effective for the Company beginning
January 1, 2007. The Company does not expect FIN 48 to
have a material impact on its financial position or results of
operations.
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement 155 Accounting for
Certain Hybrid Financial Instruments. Statement 155
amends FASB Statement 133 Accounting for Derivative
Instruments and FASB Statement 140 Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. Among other things, Statement 155
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation.
Statement 155 shall be effective for all financial
instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of the fiscal year
after September 15, 2006 (or fiscal year 2007 for the
Company). The Company believes this statement will not have a
material effect upon the financial condition or results of
operations of the Company.
In 2005, the American Institute of Certified Public Accountants
issued Statement of Position (SOP)
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection With Modifications or Exchanges of Insurance
Contracts, for implementation in the first quarter of 2007.
The SOP requires that deferred
71
acquisition costs be expensed in full when the original contract
is substantially changed by election or amendment of an existing
contract feature or by replacement with a new contract. The
Company expects to implement the SOP for contract changes
beginning in the first quarter of 2007 with no material effects
to the financial statements at implementation.
In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement 154 Accounting
Changes and Error Corrections, which changes the
requirements for the accounting and reporting of a change in
accounting principle. Statement 154 applies to all
voluntary changes in accounting principle as well as to changes
required by an accounting pronouncement that does not include
specific transition provisions. Statement 154 requires that
changes in accounting principle be retrospectively applied.
Under retrospective application, the new accounting principle is
applied as of the beginning of the first period presented as if
that principle had always been used. The cumulative effect of
the change is reflected in the carrying value of assets and
liabilities as of the first period presented and the offsetting
adjustments would be recorded to opening retained earnings.
Statement 154 replaces APB Opinion No. 20 and FASB
Statement 3. Statement 154 is effective for the
Company beginning in fiscal year 2006.
FASB Statement 123R (revised 2004), Share-Based
Payment, became effective for the Company on January 1,
2006. Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values, a previously optional accounting method that the Company
voluntarily adopted in 2003. The Company adopted
Statement 123R using the modified prospective transition
method, whereby compensation cost related to unvested awards as
of the effective date are recognized as calculated for inclusion
in the financial statements and pro forma disclosures under FASB
Statement 123, and cost related to new awards are
recognized in accordance with Statement 123R. For 2006, the
impact of the transition to Statement 123R to the
Companys income from continuing operations net of income
taxes was $27,000.
The following table illustrates the effect on net income as if
the fair-value-based method had been applied to all outstanding
and unvested option awards in each period.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands,
|
|
|
|
except per share amounts)
|
|
|
Net income, as reported
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
Add: stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
654
|
|
|
|
93
|
|
(Deduct)/Add total stock-based
employee compensation (expense) benefit determined under
fair-value-based method for all awards, net of tax
|
|
|
(682
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
203,473
|
|
|
$
|
161,811
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
Basic-pro forma
|
|
$
|
4.41
|
|
|
$
|
3.51
|
|
Diluted as reported
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
Diluted-pro forma
|
|
$
|
4.32
|
|
|
$
|
3.41
|
|
Safe
Harbor Statement under the Private Securities Litigation Reform
Act of 1995
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.
When used in written documents or oral presentations, the terms
72
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 under the caption Item 1A.
Risk Factors 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.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss arising from adverse changes in
market rates and prices, such as interest rates, foreign
currency exchange rates, and other relevant market rate or price
changes. Market risk is directly influenced by the volatility
and liquidity in the markets in which the related underlying
assets are traded.
The primary market risk to the Companys investment
portfolio is interest rate risk associated with investments and
the amount of interest that policyholders expect to have
credited to their policies. The interest rate risk taken in the
investment portfolio is managed relative to the duration of the
liabilities. The Companys investment portfolio consists
mainly of high quality, liquid securities that provide current
investment returns. The Company believes that the annuity and
universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The
Company does not anticipate significant changes in the primary
market risk exposures or in how those exposures are managed in
the future reporting periods based upon what is known or
expected to be in effect in future reporting periods.
Sensitivity analysis is defined as the measurement of potential
loss in future earnings, fair values or cash flows of market
sensitive instruments resulting from one or more selected
hypothetical changes in interest rates and other market rates or
prices over a selected time. In the Companys sensitivity
analysis model, a hypothetical change in market rates is
selected that is expected to reflect reasonably possible
near-term changes in those rates. Near term is
defined as a period of time going forward up to one year from
the date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values
to measure its potential loss. The primary market risk to the
Companys market sensitive instruments is interest rate
risk. The sensitivity analysis model uses a 100 basis point
change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model. For
invested assets, duration modeling is used to calculate changes
in fair values. Duration on invested assets is adjusted to call,
put and interest rate reset features.
The sensitivity analysis model produces a loss in fair value of
market sensitive instruments of $62.8 million based on a
100 basis point increase in interest rates as of
December 31, 2006. This loss value only reflects the impact
of an interest rate increase on the fair value of the
Companys financial instruments.
The Company uses 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 $300.0 million of debt. Approximately
$204.5 million of the Companys outstanding debt at
December 31, 2006, was exposed to the fluctuation of the
three month LIBOR (London Inter-bank Offer Rate). The
sensitivity analysis shows that if the three-month LIBOR rate
changed by 100 basis points (1%), the Companys
interest expense would change by approximately $2.0 million.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The audited consolidated financial statements of the Company and
other information required by this Item 8 are included in
this
Form 10-K
beginning on
page F-1.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
73
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
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 Securities Exchange Act of 1934, as
amended (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 annual
report.
Internal
Control Over Financial Reporting
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
Companys registered public accounting firm. We have
concluded that, as of December 31, 2006, the Company is not
an accelerated filer under
Rule 12b-2
of the Exchange Act, and, accordingly, is not obligated to
furnish the information required by Items 308(a) and
(b) of
Regulation S-K.
During the Companys fourth fiscal quarter, there has been
no change in the Companys internal control over financial
reporting that has materially affected, or is reasonably likely
to materially affect, the Companys internal controls over
financial reporting.
|
|
Item 9B.
|
Other
Information
|
None
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
See the Companys Information Statement to be filed
in connection with the 2007 Annual Meeting of Shareholders,
which is incorporated herein by reference.
For information on executive officers of the Company, reference
is made to the item entitled Executive Officers of the
Company in Part I of this report.
|
|
Item 11.
|
Executive
Compensation
|
See the Companys Information Statement to be filed
in connection with the 2007 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
See the Companys Information Statement to be filed
in connection with the 2007 Annual Meeting of Stockholders,
which is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transaction, and Director
Independence
|
See the Companys Information Statement to be filed
in connection with the 2007 Annual Meeting of Stockholders,
which is incorporated herein by reference. See
Note O of Notes to Consolidated Financial Statements.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
See the Companys Information Statement to be filed
in connection with the 2007 Annual Meeting of Stockholders, of
which the subsection captioned Independent Registered
Public Accounting Firm is incorporated herein by reference.
74
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The following consolidated financial statements of HealthMarkets
and subsidiaries are included in Item 8:
Financial
Statement Schedules
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are not applicable and therefore have been omitted.
Exhibits:
The response to this portion of Item 15 is submitted as a
separate section of this report entitled
Exhibit Index.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
By:
|
/s/ WILLIAM
J. GEDWED*
|
William J. Gedwed,
President, Chief Executive Officer and Director
Date: April 2, 2007
Pursuant to the requirements of Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ ALLEN
F. WISE*
Allen
F. Wise
|
|
Chairman of the Board and Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ WILLIAM
J. GEDWED*
William
J. Gedwed
|
|
President, Chief Executive Officer
and Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ MICHAEL
E. BOXER*
Michael
E. Boxer
|
|
Executive Vice President and Chief
Financial Officer
|
|
April 2, 2007
|
|
|
|
|
|
/s/ MARK
D. HAUPTMAN*
Mark
D. Hauptman
|
|
Chief Accounting Officer
|
|
April 2, 2007
|
|
|
|
|
|
/s/ CHINH
E. CHU*
Chinh
E. Chu
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ MURAL
R. JOSEPHSON*
Mural
R. Josephson
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ MATTHEW
KABAKER*
Matthew
Kabaker
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ ADRIAN
M. JONES*
Adrian
M. Jones
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ NATHANIEL
ZILKHA*
Nathaniel
Zilkha
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ KAMIL
M. SALAME*
Kamil
M. Salame
|
|
Director
|
|
April 2, 2007
|
76
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ STEVEN
J. SHULMAN*
Steven
J. Shulman
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
/s/ ANDREW
S. KAHR*
Andrew
S. Kahr
|
|
Director
|
|
April 2, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ MICHAEL
A. COLLIFLOWER
Michael
A. Colliflower
(Attorney-in-fact)
|
|
(Attorney-in-fact)
|
|
April 2, 2007
|
77
ANNUAL
REPORT ON
FORM 10-K
ITEM 8, ITEM 15(A)(1) and (2), (C), and (D)
FINANCIAL STATEMENTS and SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2006
HEALTHMARKETS, INC.
and
SUBSIDIARIES
NORTH RICHLAND HILLS, TEXAS
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
HealthMarkets, Inc.
We have audited the accompanying consolidated balance sheets of
HealthMarkets, Inc. and subsidiaries as of December 31,
2006 and 2005, and the related consolidated statements of
operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the years in the
threeyear period ended December 31, 2006. In
connection with our audits of the consolidated financial
statements, we have also audited the financial statement
schedules as listed in the Index at Item 15(a). These
consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with auditing standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of HealthMarkets, Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the consolidated financial statements,
taken as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note A to the consolidated financial
statements, effective January 1, 2006, HealthMarkets, Inc.
and subsidiaries adopted the provisions of Statement of
Financial Accounting Standards No. 123R (revised 2004),
Share Based Payment, and Securities and
Exchange Commission Staff Accounting Bulletin No. 108
(SAB 108), Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in the Current Year
Financial Statements. The Company used the one time special
transition provisions of SAB 108 and recorded an adjustment
to retained earnings effective January 1, 2006 for
correction of prior period errors in recording deferred
acquisition costs.
Dallas, Texas
April 2, 2007
F-2
HEALTHMARKETS,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value
(cost:
|
|
|
|
|
|
|
|
|
2006 $1,391,275;
2005 $1,496,340)
|
|
$
|
1,374,403
|
|
|
$
|
1,484,465
|
|
Equity securities, at fair value
(cost:
|
|
|
|
|
|
|
|
|
2006 $283;
2005 $1,508)
|
|
|
318
|
|
|
|
1,347
|
|
Policy loans
|
|
|
14,625
|
|
|
|
16,325
|
|
Short-term and other investments
|
|
|
412,498
|
|
|
|
275,787
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
1,801,844
|
|
|
|
1,777,924
|
|
Cash and cash equivalents
|
|
|
32,756
|
|
|
|
|
|
Student loans
|
|
|
105,846
|
|
|
|
109,808
|
|
Restricted cash
|
|
|
16,238
|
|
|
|
22,517
|
|
Investment income due and accrued
|
|
|
22,633
|
|
|
|
24,263
|
|
Due premiums
|
|
|
3,299
|
|
|
|
52,259
|
|
Reinsurance receivable
|
|
|
155,283
|
|
|
|
24,002
|
|
Agents and other receivables
|
|
|
39,232
|
|
|
|
30,417
|
|
Deferred acquisition costs
|
|
|
197,757
|
|
|
|
131,120
|
|
Property and equipment, net
|
|
|
64,436
|
|
|
|
81,880
|
|
Goodwill and other intangible assets
|
|
|
86,871
|
|
|
|
79,004
|
|
Recoverable federal income taxes
|
|
|
23,929
|
|
|
|
13,148
|
|
Deferred income tax
|
|
|
|
|
|
|
12,102
|
|
Other assets
|
|
|
38,205
|
|
|
|
13,086
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,588,329
|
|
|
$
|
2,371,530
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Policy liabilities:
|
|
|
|
|
|
|
|
|
Future policy and contract benefits
|
|
$
|
453,715
|
|
|
$
|
447,992
|
|
Claims
|
|
|
517,132
|
|
|
|
558,106
|
|
Unearned premiums
|
|
|
151,758
|
|
|
|
155,285
|
|
Other policy liabilities
|
|
|
12,569
|
|
|
|
12,881
|
|
Accounts payable and accrued
expenses
|
|
|
48,363
|
|
|
|
54,170
|
|
Cash overdraft.
|
|
|
|
|
|
|
3,736
|
|
Other liabilities
|
|
|
128,018
|
|
|
|
115,624
|
|
Deferred income taxes payable
|
|
|
73,575
|
|
|
|
|
|
Debt
|
|
|
556,070
|
|
|
|
15,470
|
|
Student Loan Credit Facility
|
|
|
118,950
|
|
|
|
130,900
|
|
Net liabilities of discontinued
operations
|
|
|
3,794
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,063,944
|
|
|
|
1,500,449
|
|
Commitments and Contingencies
(Note P)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.01 per share authorized
10,000,000 shares, no shares issued and outstanding in 2006
and 2005
|
|
|
|
|
|
|
|
|
Common Stock,
Class A-1,
par value $0.01 per share authorized
90,000,000 shares in 2006, 26,889,457 issued and
outstanding;
Class A-2,
par value $0.01 per share authorized
20,000,000 shares in 2006, 3,131,503 issued and 3,032,642
outstanding; common stock 47,543,590 issued and 46,134,199
outstanding in 2005
|
|
|
300
|
|
|
|
476
|
|
Additional paid-in capital
|
|
|
12,529
|
|
|
|
212,331
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(12,552
|
)
|
|
|
(7,823
|
)
|
Retained earnings
|
|
|
527,978
|
|
|
|
697,243
|
|
Treasury stock, at cost (98,861
Class A-2
common shares in 2006 and 1,409,391 common shares in 2005)
|
|
|
(3,870
|
)
|
|
|
(31,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
524,385
|
|
|
|
871,081
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,588,329
|
|
|
$
|
2,371,530
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
HEALTHMARKETS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health (includes amounts received
from related parties of $1,061, $957 and $2,085 in 2006, 2005
and 2004, respectively)
|
|
$
|
1,671,571
|
|
|
$
|
1,855,969
|
|
|
$
|
1,812,892
|
|
Life premiums and other
considerations
|
|
|
65,675
|
|
|
|
61,565
|
|
|
|
45,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,737,246
|
|
|
|
1,917,534
|
|
|
|
1,858,743
|
|
Investment income (includes amounts
received from related parties of $29, $16 and $9 in 2006, 2005
and 2004, respectively)
|
|
|
104,147
|
|
|
|
97,788
|
|
|
|
85,868
|
|
Other income (includes amounts
received from related parties of $353, $1,103 and $2,488 in
2006, 2005 and 2004, respectively)
|
|
|
104,634
|
|
|
|
106,656
|
|
|
|
117,827
|
|
Gains (losses) on sale of
investments
|
|
|
200,544
|
|
|
|
(760
|
)
|
|
|
6,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,146,571
|
|
|
|
2,121,218
|
|
|
|
2,069,109
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, and settlement
expenses
|
|
|
996,617
|
|
|
|
1,092,136
|
|
|
|
1,134,901
|
|
Underwriting, policy acquisition
costs, and insurance expenses (includes amounts paid to related
parties of $4,305, $6,670 and $7,294 in 2006, 2005 and 2004,
respectively)
|
|
|
581,163
|
|
|
|
621,532
|
|
|
|
625,761
|
|
Variable stock compensation expense
|
|
|
16,603
|
|
|
|
7,214
|
|
|
|
14,307
|
|
Other expenses, (includes amounts
paid to related parties of $21,230, $1,676 and $1,320 in 2006,
2005 and 2004, respectively)
|
|
|
158,749
|
|
|
|
81,177
|
|
|
|
69,574
|
|
Interest expense
|
|
|
41,141
|
|
|
|
6,009
|
|
|
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,794,273
|
|
|
|
1,808,068
|
|
|
|
1,847,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
|
|
|
352,298
|
|
|
|
313,150
|
|
|
|
221,149
|
|
Federal income taxes
|
|
|
135,730
|
|
|
|
110,180
|
|
|
|
75,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
216,568
|
|
|
|
202,970
|
|
|
|
145,881
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations, (net of
income tax benefit (expense) of $19,495, $(2,614) and $1,084 in
2006, 2005 and 2004, respectively)
|
|
|
21,170
|
|
|
|
531
|
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
6.19
|
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
Income from discontinued operations
|
|
|
0.61
|
|
|
|
0.01
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
6.80
|
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
6.07
|
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
Income from discontinued operations
|
|
|
0.59
|
|
|
|
0.01
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
6.66
|
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
HEALTHMARKETS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Income
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2004
|
|
$
|
481
|
|
|
$
|
210,320
|
|
|
$
|
24,607
|
|
|
$
|
378,366
|
|
|
$
|
(26,206
|
)
|
|
$
|
587,568
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,558
|
|
|
|
|
|
|
|
161,558
|
|
Other comprehensive loss, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(6,877
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,877
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(4,470
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,477
|
)
|
|
|
|
|
|
|
(11,477
|
)
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
10,358
|
|
|
|
10,607
|
|
Exercise stock options
|
|
|
6
|
|
|
|
5,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,552
|
|
Stock-based compensation
|
|
|
|
|
|
|
489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489
|
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,972
|
|
Retirement of treasury stock
|
|
|
(11
|
)
|
|
|
(16,729
|
)
|
|
|
|
|
|
|
|
|
|
|
16,740
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,946
|
)
|
|
|
(37,946
|
)
|
Other
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
476
|
|
|
|
202,139
|
|
|
|
20,137
|
|
|
|
528,447
|
|
|
|
(37,054
|
)
|
|
|
714,145
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,501
|
|
|
|
|
|
|
|
203,501
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(43,016
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,016
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
15,056
|
|
|
|
|
|
|
|
|
|
|
|
15,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(27,960
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,705
|
)
|
|
|
|
|
|
|
(34,705
|
)
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
11,245
|
|
|
|
|
|
|
|
|
|
|
|
9,990
|
|
|
|
21,235
|
|
Exercise stock options
|
|
|
3
|
|
|
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,582
|
|
Stock-based compensation
|
|
|
|
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,136
|
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,861
|
|
Retirement of treasury stock
|
|
|
(3
|
)
|
|
|
(7,519
|
)
|
|
|
|
|
|
|
|
|
|
|
7,522
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,514
|
)
|
|
|
(11,514
|
)
|
Other
|
|
|
|
|
|
|
890
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
476
|
|
|
|
212,331
|
|
|
|
(7,823
|
)
|
|
|
697,243
|
|
|
|
(31,146
|
)
|
|
|
871,081
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,738
|
|
|
|
|
|
|
|
237,738
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(4,801
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,801
|
)
|
Change in unrealized gains (losses)
on cash flow hedging relationship
|
|
|
|
|
|
|
|
|
|
|
(2,475
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,475
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(4,729
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting policy (see Note A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,462
|
|
|
|
|
|
|
|
50,462
|
|
Additional paid-in capital
reclassification
|
|
|
|
|
|
|
425,815
|
|
|
|
|
|
|
|
(425,815
|
)
|
|
|
|
|
|
|
|
|
Merger costs reducing equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,650
|
)
|
|
|
|
|
|
|
(31,650
|
)
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
10,698
|
|
|
|
|
|
|
|
|
|
|
|
6,812
|
|
|
|
17,510
|
|
Exercise stock options
|
|
|
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337
|
|
Stock-based compensation
|
|
|
|
|
|
|
3,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,819
|
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,390
|
|
Retirement of treasury stock
|
|
|
(179
|
)
|
|
|
(1,636,143
|
)
|
|
|
|
|
|
|
|
|
|
|
1,636,322
|
|
|
|
|
|
Contribution from private equity
investors
|
|
|
|
|
|
|
985,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
985,000
|
|
Contribution of derivatives from
private equity investors
|
|
|
|
|
|
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,963
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,620,733
|
)
|
|
|
(1,620,733
|
)
|
Sale of treasury stock
|
|
|
|
|
|
|
4,779
|
|
|
|
|
|
|
|
|
|
|
|
4,875
|
|
|
|
9,654
|
|
Other
|
|
|
3
|
|
|
|
2,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
300
|
|
|
$
|
12,529
|
|
|
$
|
(12,552
|
)
|
|
$
|
527,978
|
|
|
$
|
(3,870
|
)
|
|
$
|
524,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
HEALTHMARKETS,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
Income from discontinued operations
|
|
|
(21,170
|
)
|
|
|
(531
|
)
|
|
|
(15,677
|
)
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) losses on sale of
investments
|
|
|
(200,544
|
)
|
|
|
760
|
|
|
|
(6,671
|
)
|
Change in accrued investment income
|
|
|
(3,648
|
)
|
|
|
(5,951
|
)
|
|
|
(4,538
|
)
|
Change in due premiums
|
|
|
(19,576
|
)
|
|
|
33,792
|
|
|
|
(31,383
|
)
|
Change in reinsurance receivables
|
|
|
(131,803
|
)
|
|
|
535
|
|
|
|
32,710
|
|
Change in other receivables
|
|
|
1,165
|
|
|
|
6,606
|
|
|
|
80
|
|
Change in current federal income
taxes payable (recoverable)
|
|
|
(10,781
|
)
|
|
|
(16,503
|
)
|
|
|
(15,275
|
)
|
Acquisition costs deferred
|
|
|
(170,937
|
)
|
|
|
(103,185
|
)
|
|
|
(93,383
|
)
|
Amortization of deferred
acquisition costs
|
|
|
172,112
|
|
|
|
82,567
|
|
|
|
73,532
|
|
Depreciation and amortization
|
|
|
28,007
|
|
|
|
31,154
|
|
|
|
29,392
|
|
Deferred income tax (benefit) change
|
|
|
61,054
|
|
|
|
19,523
|
|
|
|
(153
|
)
|
Change in policy liabilities
|
|
|
141,394
|
|
|
|
(72,162
|
)
|
|
|
90,349
|
|
Change in other liabilities and
accrued expenses
|
|
|
6,351
|
|
|
|
(952
|
)
|
|
|
30,898
|
|
Variable stock compensation
(benefit)
|
|
|
16,603
|
|
|
|
7,214
|
|
|
|
14,307
|
|
Cash transferred for net
liabilities of Student Insurance Division and Star HRG
|
|
|
(85,498
|
)
|
|
|
|
|
|
|
|
|
Other items, net
|
|
|
3,696
|
|
|
|
1,398
|
|
|
|
6,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Continuing
Operations
|
|
|
24,163
|
|
|
|
187,766
|
|
|
|
272,020
|
|
Cash Provided by (Used in)
Discontinued Operations
|
|
|
18,679
|
|
|
|
(2,377
|
)
|
|
|
(17,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities
|
|
|
42,842
|
|
|
|
185,389
|
|
|
|
254,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(165,168
|
)
|
|
|
(295,919
|
)
|
|
|
(425,209
|
)
|
Sales
|
|
|
220,493
|
|
|
|
166,901
|
|
|
|
181,103
|
|
Maturities, calls and redemptions
|
|
|
146,497
|
|
|
|
131,701
|
|
|
|
130,543
|
|
Student loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and originations
|
|
|
(5,032
|
)
|
|
|
(7,065
|
)
|
|
|
(11,279
|
)
|
Maturities
|
|
|
14,272
|
|
|
|
10,244
|
|
|
|
8,798
|
|
Short-term and other
investments net
|
|
|
(128,829
|
)
|
|
|
(105,320
|
)
|
|
|
(43,256
|
)
|
Distribution from investment in
Grapevine Finance LLC
|
|
|
144,594
|
|
|
|
|
|
|
|
|
|
Purchase of subsidiaries and life
and health business
|
|
|
|
|
|
|
|
|
|
|
(53,100
|
)
|
Additional cost of purchase of
subsidiary
|
|
|
|
|
|
|
(7,110
|
)
|
|
|
|
|
Change in restricted cash
|
|
|
6,279
|
|
|
|
16,938
|
|
|
|
3,022
|
|
Additions to property and equipment
|
|
|
(14,457
|
)
|
|
|
(11,440
|
)
|
|
|
(25,424
|
)
|
Intangible asset acquired
|
|
|
(47,500
|
)
|
|
|
|
|
|
|
|
|
Change in agents receivables
|
|
|
(7,926
|
)
|
|
|
(5,141
|
)
|
|
|
(4,882
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in)
Continuing Operations
|
|
|
163,223
|
|
|
|
(106,211
|
)
|
|
|
(239,684
|
)
|
Cash Provided by Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
25,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in)
Investing Activities
|
|
|
163,223
|
|
|
|
(106,211
|
)
|
|
|
(214,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
(62,500
|
)
|
|
|
|
|
|
|
(18,951
|
)
|
Repayment of student loan credit
facilities
|
|
|
(11,950
|
)
|
|
|
(19,100
|
)
|
|
|
|
|
Debt proceeds received in Merger
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Change in cash overdraft.
|
|
|
(3,736
|
)
|
|
|
(5,013
|
)
|
|
|
8,749
|
|
Capitalized debt issuance costs
|
|
|
(32,539
|
)
|
|
|
|
|
|
|
(430
|
)
|
Equity costs related to Merger
|
|
|
(31,650
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of trust
securities
|
|
|
100,000
|
|
|
|
|
|
|
|
15,000
|
|
Deposits from investment products
|
|
|
12,071
|
|
|
|
10,602
|
|
|
|
9,965
|
|
Withdrawals from investment products
|
|
|
(21,549
|
)
|
|
|
(22,847
|
)
|
|
|
(26,627
|
)
|
Exercising of stock options
|
|
|
337
|
|
|
|
2,582
|
|
|
|
5,552
|
|
Tax benefits from share-based
compensation
|
|
|
1,390
|
|
|
|
1,861
|
|
|
|
1,972
|
|
Contributions from private equity
investors
|
|
|
985,000
|
|
|
|
|
|
|
|
|
|
Sale of shares to agents
|
|
|
9,654
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(1,620,733
|
)
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
Dividends paid to shareholders
|
|
|
|
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
Other
|
|
|
2,896
|
|
|
|
801
|
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Continuing Operations
|
|
|
(173,309
|
)
|
|
|
(79,178
|
)
|
|
|
(53,900
|
)
|
Cash Provided by Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing
Activities
|
|
|
(173,309
|
)
|
|
|
(79,178
|
)
|
|
|
(53,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Increase) Decrease in Cash
|
|
|
32,756
|
|
|
|
|
|
|
|
(14,014
|
)
|
Cash and Cash Equivalents at
beginning of period
|
|
|
|
|
|
|
|
|
|
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of
period
|
|
$
|
32,756
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note X for disclosure of non-cash activities related
to the consolidated statement of cash flows.
See accompanying notes to consolidated financial statements.
F-6
HEALTHMARKETS,
INC. AND SUBSIDIARIES
Note A
Significant Accounting Policies
Corporate
Name Change
On April 17, 2006, the Company changed its corporate name
from UICI to HealthMarkets, Inc. All references in this Annual
Report on
Form 10-K
give effect to such name change. HealthMarkets, Inc. and its
subsidiaries are collectively referred to throughout this Annual
Report on
Form 10-K
as the Company or
HealthMarkets.
Merger
Completed
On April 5, 2006, the Company completed a merger (the
Merger) providing for the acquisition of the Company
by affiliates of a group of private equity investors, including
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners (the Private
Equity Investors). See Note B. As a result of
the Merger, holders of record on April 5, 2006 of
HealthMarkets common shares (other than shares held by certain
members of management and shares held through
HealthMarkets agent stock accumulation plans) received
$37.00 in cash per share. In the transaction,
HealthMarkets public shareholders received aggregate
consideration of approximately $1.6 billion, of which
approximately $985.0 million was contributed as equity by
the private equity investors. The balance of the Merger
consideration was financed with the proceeds of a
$500.0 million term loan facility extended by a group of
banks, the proceeds of $100.0 million of trust preferred
securities issued in a private placement, and Company cash on
hand in the amount of approximately $42.8 million.
Principles
of Consolidation
The consolidated financial statements include the accounts of
HealthMarkets and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
HealthMarkets is a holding company, and the Company conducts its
insurance 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). MEGA is an insurance
company domiciled in Oklahoma and is licensed to issue health,
life and annuity insurance policies in all states except New
York. Mid-West is an insurance company domiciled in Texas and is
licensed to issue health, life and annuity insurance policies in
Puerto Rico and all states except Maine, New Hampshire, New
York, and Vermont. Chesapeake is an insurance company domiciled
in Oklahoma and is licensed to issue health and life insurance
policies in all states except New Jersey, New York and Vermont.
Nature
of Operations
The Company offers insurance (primarily health and life) to
niche consumer and institutional markets. Through its
subsidiaries the Company issues primarily health insurance
policies, covering individuals and families, to the
self-employed, association groups and small businesses.
Information on the Companys operations by segment is
included in Note T.
Through the Companys Self-Employed Agency Division
(SEA), the Company offers a broad range of health
insurance products for self-employed individuals and individuals
who work for small businesses. HealthMarkets basic
hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include traditional
fee-for-service
indemnity plans and preferred provider organization
(PPO) plans, as well as other supplemental types of
coverage. Commencing in 2006, the Company began to offer on a
selective
state-by-state
basis a new suite of health insurance products to the
self-employed market, including a basic medical-surgical expense
plan, catastrophic expense PPO plans and catastrophic expense
consumer guided health plans. The Company markets these products
to the self-employed and individual markets through independent
contractor agents associated with UGA-Association Field Services
and Cornerstone America, the Companys
dedicated agency sales forces that primarily sell
the Companys products.
F-7
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Through its Life Insurance Division, the Company also issues
universal life, whole life and term life insurance products to
individuals in the self-employed market, the middle income
market; the Hispanic market and the senior market. The Company
distributes its life insurance products directly to individuals
in the self-employed market through agents associated with
UGA-Association Field Services and Cornerstone America. The
Company distributes its life insurance products to the middle
income , the Hispanic market and the senior market through
marketing relationships with two independent managing general
agents (MGAs).
Through its ZON Re USA LLC unit, the Company underwrites,
administers and issues accidental death, accidental death and
dismemberment (AD&D), accident medical and accident
disability insurance products, both on a primary and on a
reinsurance basis. The Company distributes these products
through professional reinsurance intermediaries and a network of
independent commercial insurance agents, brokers and third party
administrators.
Business
Segments
The Companys business segments for financial reporting
purposes include (i) the Insurance segment (which includes
the businesses of the Companys Self-Employed Agency
Division, the Life Insurance Division and Other Insurance);
(ii) Other Key Factors (which includes investment income
not allocated to the Insurance segment, realized gains or losses
on sale of investments, interest expense on corporate debt,
general expenses relating to corporate operations, merger
transaction expenses, variable non-cash stock-based compensation
and operations that do not constitute reportable operating
segments); and (iii) Disposed Operations (which includes
the Companys former Star HRG and former Student Insurance
Division).
Disposed
Operations Star HRG Division and Student Insurance
Division
During 2006, the Company completed the sale of two of its former
business units. In particular, on July 11, 2006, the
Company completed the sale of substantially all of the assets
comprising its former Star HRG operations, through which the
Company marketed limited benefit health insurance plans for
entry level, high turnover, and hourly employees. On
December 1, 2006, the Company completed the sale of the
assets comprising its former Student Insurance operations,
through which the Company offered tailored health insurance
programs that generally provided single school year coverage to
individual students at colleges and universities.
Because the Companys insurance subsidiaries remain parties
to coinsurance agreements with the purchasers of those
businesses, for financial reporting purposes, at
December 31, 2006 the Company has reflected and will
continue to reflect the policy liabilities ceded to and assumed
by the purchasers under the coinsurance agreements as
Policy liabilities on its Consolidated Balance
Sheet, with a corresponding amount recorded as an asset as a
Reinsurance receivable on its Consolidated Balance
Sheet. In addition, the Company will continue to report in
future periods the residual results of operations of these
businesses (anticipated to consist solely of residual wind-down
expenses and any
true-up,
claw-back or earn-out items associated with the sales) in
continuing operations and classified to the Companys
Disposed Operations business segment. See Note C.
Discontinued
Operations
The Company has reflected as discontinued operations for
financial reporting purposes the results of its former Academic
Management Services (AMS) subsidiary and its former
Special Risk Division operations. See Note V.
Basis
of Presentation
The consolidated financial statements have been prepared on the
basis of accounting principles generally accepted in the United
States of America (GAAP). The more significant
variances between GAAP and statutory accounting practices
prescribed or permitted by regulatory authorities for insurance
companies are: fixed maturities are carried at fair value for
investments classified as available for sale for GAAP rather
than generally at amortized cost; the deferral of new business
acquisition costs, rather than expensing them as incurred; the
determination of the liability for future policyholder benefits
based on realistic assumptions, rather than on statutory rates
for mortality
F-8
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and interest; the recording of reinsurance receivables as assets
for GAAP rather than as reductions of liabilities; and the
exclusion of non-admitted assets for statutory purposes. See
Note N for stockholders equity and net income
from insurance subsidiaries as determined using statutory
accounting practices.
Use of
Estimates
The preparation of the consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. Management periodically reviews its estimates and
assumptions. Actual results may differ from the estimates and
assumptions used in preparing the consolidated financial
statements.
Investments
Fixed maturities consist of bonds and notes issued by
governments, businesses, or other entities, mortgage and asset
backed securities and similar securitized loans. All fixed
maturity investments classified as available for
sale are reported at fair value. Equity securities consist
of common stocks and are carried at fair value. Mortgage loans
are carried at unpaid balances, less allowance for losses.
Policy loans are carried at the aggregate unpaid balance.
Short-term investments are generally carried at cost which
approximates fair value. Premiums and discounts on
mortgage-backed securities are amortized over a period based on
estimated future principal payments, including prepayments.
Prepayment assumptions are reviewed periodically and adjusted to
reflect actual prepayments and changes in expectations. The most
significant determinants of prepayments are the differences
between interest rates of the underlying mortgages and current
mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of
underlying mortgages, the geographic location of the mortgaged
properties and the creditworthiness of the borrowers. Variations
from anticipated prepayments will affect the life and yield of
these securities.
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 an
other-than-temporary
decline in fair values. Unrealized investment gains or losses on
securities carried at fair value, net of applicable deferred
income tax, are reported in accumulated other comprehensive
income (loss) as a separate component of stockholders
equity and accordingly have no effect on net income (loss).
Purchases and sales of short-term financial instruments are part
of investing activities and not necessarily a part of the cash
management program. Short-term financial instruments are
classified as investments in the Consolidated Balance Sheets and
are included as investing activities in the Consolidated
Statements of Cash Flows.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary. In
its review, management considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific adverse conditions affecting a
particular investment; decline in fair value attributable to
specific conditions, such as conditions in an industry or in a
geographic area; decline in fair value for an extended period of
time; downgrades by rating agencies from investment grade to
non-investment grade; financial condition deterioration of the
issuer and situations where dividends have been reduced or
eliminated or scheduled interest payments have not been made.
Management monitors investments where two or more of the above
indicators exist and investments are identified by the Company
in economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of
determination.
Cash
and Cash Equivalents
The Company classifies as cash and cash equivalents unrestricted
cash on deposit in banks and invested temporarily in various
instruments with maturities of three months or less at the time
of purchase.
F-9
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Student
Loans
Student loans (consisting of student loans originated under the
Companys former College First Alternative Loan program)
are carried at their unpaid principal balances (less any
applicable allowance for losses).
Deferred
Acquisition Costs
Health
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its health insurance
policies, including underwriting and policy issuance costs,
costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to
agents). The Company defers those costs that vary with
production. The Company generally defers commissions paid to
agents and premium taxes with respect to the portion of health
premium collected but not yet earned and the Company amortizes
the deferred expense over the period as and when the premium is
earned. Costs associated with generating sales leads with
respect to the health business issued through the SEA Division
are capitalized and amortized over a two-year period, which
approximates the average life of a policy. For financial
reporting purposes, other underwriting and policy issuance costs
(which the Company estimates are more fixed than variable) with
respect to health policies issued through the Companys SEA
and Other Insurance division are expensed as incurred.
At December 31, 2006, the Company changed its accounting
policy, effective January 31, 2006, with respect to the
amortization of a portion of deferred acquisition costs
associated with commissions paid to agents. Generally, the first
year and second year commission rates on policies issued by the
Companys SEA Division are higher than renewal year
commission rates. Commencing in 2006, the Company changed its
accounting methodology with respect to the first year and second
year excess commissions and now amortizes those excess
commissions over a two year period (based on recent persistency
studies showing that SEA policies have an average life of
2.09 years) rather than expensing the excess commissions in
the period the commissions were paid. See the discussion
below under the caption 2006 Change in Accounting
Policy.
Life
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its life insurance policies,
including underwriting and policy issuance costs. The Company
defers those costs that vary with production. The Company
capitalizes commission and issue costs primarily associated with
the new business of its Life Insurance Division. Deferred
acquisition costs consist primarily of sales commissions and
other underwriting costs of new life insurance sales. Policy
acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying
period of the related policies, in proportion to the ratio of
the annual premium revenue to the total premium revenue
anticipated. Such anticipated premium revenue, which is modified
to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For
universal life-type and annuity contracts, capitalized costs are
amortized at a constant rate based on the present value of the
estimated gross profits expected to be realized on the book of
contracts.
Other
The cost of business acquired through acquisition of
subsidiaries or blocks of business is determined based upon
estimates of the future profits inherent in the business
acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income
is considered in determining whether a premium deficiency
exists. The amortization period is adjusted when estimates of
current or future gross profits to be realized from a group of
products are revised.
The Company monitors and assesses the recoverability of deferred
health and life policy acquisition costs on a quarterly basis.
F-10
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is an analysis of cost of policies acquired and
deferred acquisition costs of policies issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Costs of policies acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
3,206
|
|
|
$
|
4,991
|
|
|
$
|
7,563
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization(1)
|
|
|
(1,328
|
)
|
|
|
(1,785
|
)
|
|
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
1,878
|
|
|
|
3,206
|
|
|
|
4,991
|
|
Deferred costs of policies
issued(2)
|
|
|
195,879
|
|
|
|
127,914
|
|
|
|
105,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,757
|
|
|
$
|
131,120
|
|
|
$
|
110,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The discount rate used in the amortization of the costs of
policies acquired ranges from 7% to 20% based on a variety of
assumptions including the type of policies acquired. |
|
(2) |
|
Reflects change in accounting policy see
discussion below under the caption 2006 Change in
Accounting Policy. |
Set forth below is an analysis of deferred costs of policies
issued at each of December 31, 2006, 2005 and 2004 and the
related deferral and amortization in each of the years then
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred costs of policies issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
127,914
|
|
|
$
|
105,511
|
|
|
$
|
83,088
|
|
DAC adjustment(1)
|
|
|
77,633
|
|
|
|
|
|
|
|
|
|
Disposal(2)
|
|
|
(9,821
|
)
|
|
|
|
|
|
|
|
|
Additions
|
|
|
170,937
|
|
|
|
103,185
|
|
|
|
93,383
|
|
Amortization
|
|
|
(170,784
|
)
|
|
|
(80,782
|
)
|
|
|
(70,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
195,879
|
|
|
$
|
127,914
|
|
|
$
|
105,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects change in accounting policy see
discussion below under the caption 2006 Change in
Accounting Policy. |
|
(2) |
|
Deferred costs disposed of in sale of Student Insurance Division
assets December 1, 2006. |
The amortization for the next five years and thereafter of
capitalized costs of policies acquired at December 31, 2006
is estimated to be as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
1,078
|
|
2008
|
|
|
200
|
|
2009
|
|
|
200
|
|
2010
|
|
|
200
|
|
2011
|
|
|
200
|
|
2012 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,878
|
|
|
|
|
|
|
F-11
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Cash
At December 31, 2006 and 2005, the Company held restricted
cash in the amount of $16.2 million and $22.5 million,
respectively. Restricted cash consisted primarily of cash and
cash equivalents securing student loan credit facilities held by
a bankruptcy-remote, special purpose entity in the amount of
$14.2 million and $20.5 million as of
December 31, 2006 and 2005, respectively, which cash may be
used only for repayment of associated borrowings
and/or
acquisitions of additional student loans. Effective
February 1, 2007 any restricted cash remaining on deposit
in the acquisitions fund shall be used only for repayment of
existing borrowings. See Note J.
Allowance
for Doubtful Accounts
The Company establishes an allowance for potential losses that
could result from defaults or write-downs on various assets. The
allowance is maintained at a level that the Company believes is
adequate to absorb estimated losses.
The Companys allowance for losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Agents receivables
|
|
$
|
4,164
|
|
|
$
|
3,710
|
|
Other receivables
|
|
|
668
|
|
|
|
3,699
|
|
Mortgage loans
|
|
|
33
|
|
|
|
55
|
|
Student loans
|
|
|
3,256
|
|
|
|
2,722
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,121
|
|
|
$
|
10,186
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment includes buildings, leasehold
improvements, furniture, software and equipment, all of which
are reported at depreciated cost that is computed using straight
line and accelerated methods based upon the estimated useful
lives of the assets (generally 3 to 7 years for furniture,
software and equipment and 30 to 39 years for buildings).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Land and improvements
|
|
$
|
2,431
|
|
|
$
|
2,431
|
|
Buildings and leasehold
improvements
|
|
|
32,884
|
|
|
|
31,737
|
|
Construction in progress
|
|
|
|
|
|
|
2,469
|
|
Software
|
|
|
75,362
|
|
|
|
85,677
|
|
Furniture and equipment
|
|
|
39,767
|
|
|
|
51,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,444
|
|
|
|
173,358
|
|
Less accumulated depreciation
|
|
|
86,008
|
|
|
|
91,478
|
|
|
|
|
|
|
|
|
|
|
Property and equipment (net)
|
|
$
|
64,436
|
|
|
$
|
81,880
|
|
|
|
|
|
|
|
|
|
|
Construction in progress in the amount of $2.5 million at
December 31, 2005 relates to a new facility that was placed
in service in January 2006 and transferred to buildings and
leasehold improvements.
F-12
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill
and Other Intangibles
The Company accounts for goodwill and other intangibles using
Financial Accounting Standards Board Statement 142,
Goodwill and Other Intangible Assets. Statement 142
requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Statement 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment. The
Company amortizes its intangible assets with estimable useful
lives over a period ranging from one to twenty-five years. The
Company has determined that it will review goodwill and other
intangible assets for impairment as of November 1 of each
year or more frequently if certain indicators arise. An
impairment loss would be recorded in the period such
determination was made. Following the Companys annual
review in 2006 for impairment of goodwill and other intangible
assets related to continuing operations, the Company recorded an
impairment charge to other intangible assets at the SEA Division
in the amount of $496,000 related to the HealthMarket customer
list acquired in October 2004. For financial reporting purposes
the impairment charge was recorded in Underwriting, policy
acquisition costs, and insurance expenses on the
Companys Consolidated Statements of Operations.
Capitalized
Debt Issuance Costs
Debt issuance costs, representing primarily legal costs
associated with the issuance of the term loan credit facility
and the trust preferred securities, were capitalized and are
amortized over the life of the underlying debt using the
effective interest method. See Note I.
Derivatives
The Company uses derivative instruments 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 derivative instruments are
carried at fair value on the balance sheet. The Company values
its derivative instruments using a third party.
Certain derivative instruments are formally designated in
SFAS 133 hedge relationships as a hedge of one of the
following: the fair value of a recognized asset or liability,
the expected future cash flows of a recognized asset or
liability, or the expected future cash flows of a forecasted
transaction. The Company only utilizes cash flow derivatives
and, both at the inception of the hedge and on an ongoing basis,
the Company assesses the effectiveness of the hedge instrument
in achieving offsetting changes in cash flows compared to the
hedged item. To prospectively test effectiveness, management
performs a qualitative assessment of the critical terms of the
hedged item and hedging instrument. In certain cases, management
also performs a quantitative assessment by estimating the change
in the fair value of the derivative and hedged item under
various interest rate shock scenarios using either the dollar
offset ratio method or regression analysis. The method utilized
to assess retrospective hedge effectiveness is the dollar offset
ratio test and was applied on a quarterly basis.
As with any financial instrument, derivative instruments have
inherent risks, primarily market and credit risk. Market risk
associated with changes in interest rates is managed as part of
the Companys overall market risk monitoring process by
establishing and monitoring limits as to the degree of risk that
may be undertaken. Credit risk occurs when a counterparty to a
derivative contract in which the Company has an unrealized gain
fails to perform according to the terms of the agreement. The
Company minimizes its credit risk by entering into transactions
with counterparties that maintain high credit ratings.
Under the guidelines of SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended,
all derivative instruments are required to be carried on the
balance sheet at fair value on the balance sheet date. For a
derivative instrument designated as a cash flow hedge, the
effective portion of changes in the fair value of the derivative
instrument is recorded under the caption Change in
unrealized gains (losses) on cash flow hedging
relationship in the Companys Consolidated Statement
of Stockholders Equity and Comprehensive Income (Loss)
F-13
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and is recognized in the statement of operations when the hedged
item affects results of operations. If it is determined that
(i) an interest rate swap is not highly effective in
offsetting changes in the cash flows of a hedged item,
(ii) the derivative expires or is sold, terminated or
exercised, or (iii) the derivative is undesignated as a
hedge instrument because it is unlikely that a forecasted
transaction will occur, the Company discontinues hedge
accounting prospectively.
If hedge accounting is discontinued, the derivative instrument
will continue to be carried at fair value, with changes in the
fair value of the derivative instrument recognized in the
current periods results of operations. When hedge
accounting is discontinued because it is probable that a
forecasted transaction will not occur, the accumulated gains and
losses included in accumulated other comprehensive income will
be recognized immediately in results of operations.
Future
Policy and Contract Benefits and Claim Liabilities
With respect to accident and health insurance, future policy
benefits are primarily attributable to a
return-of-premium
(ROP) rider that the Company has issued with certain health
policies. Pursuant to this rider, the Company undertakes to
return to the policyholder on or after age 65 all premiums
paid less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. The Company records an ROP
liability to fund longer-term obligations associated with the
ROP rider. The future policy benefits for the ROP are computed
using the net level premium method using assumptions with
respect to current investment yield, mortality and withdrawal
rates, and annual increases in future gross premiums determined
to be appropriate at the time the business was first acquired by
the Company, with an implicit margin for adverse deviations. A
claim offset for actual benefits paid through the reporting date
is applied to the ROP liability for all policies on a
contract-by-contract
basis.
The remainder of the future policy benefits for accident and
health are principally contract reserves on issue-age rated
policies, reserves for other riders providing future benefits,
and reserves for the refund of a portion of premium as required
by state law. These liabilities are typically calculated as the
present value of future benefits less the present value of
future net premiums, computed on a net level premium basis using
assumptions determined to be appropriate as of the date the
business was acquired by the Company. These assumptions may
include current investment yield, mortality, withdrawal rates,
or other assumptions determined to be appropriate.
Traditional life insurance future policy benefit liabilities are
computed on a net level premium method using assumptions with
respect to current investment yield, mortality, withdrawal
rates, and other assumptions determined to be appropriate as of
the date the business was issued or purchased by the Company.
Future contract benefits related to universal life-type and
annuity contracts are generally based on policy account values.
Claim liabilities represent the estimated liabilities for claims
reported plus claims incurred but not yet reported. The
liabilities are subject to the impact of actual payments and
future changes in claim factors; as adjustments become necessary
they are reflected in current operations.
The Company uses the developmental method to estimate its health
claim liabilities. This method applies completion factors to
claim payments in order to estimate the ultimate amount of the
claim. These completion factors are derived from historical
experience and are dependent on the incurred dates of the claim
payments. See Note G Policy Liabilities
for a discussion of claim liabilities.
Recognition
of Premium Revenues and Costs
Premiums on traditional life insurance are recognized as revenue
when due. Benefits and expenses are matched with premiums so as
to result in recognition of income over the term of the
contract. This matching is accomplished by means of the
provision for future policyholder benefits and expenses and the
deferral and amortization of acquisition costs.
F-14
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Premiums and annuity considerations collected on universal
life-type and annuity contracts are recorded using deposit
accounting, and are credited directly to an appropriate policy
reserve account, without recognizing premium income. Revenues
from universal life-type and annuity contracts are amounts
assessed to the policyholder for the cost of insurance
(mortality charges), policy administration charges and surrender
charges and are recognized as revenue when assessed based upon
one-year service periods. Amounts assessed for services to be
provided in future periods are reported as unearned revenue and
are recognized as revenue over the benefit period. Contract
benefits that are charged to expense include benefit claims
incurred in the period in excess of related contract balances
and interest credited to contract balances.
Unearned
Premiums
Premiums on health insurance contracts are recognized as earned
over the period of coverage on a pro rata basis. The Company
records as a liability the portion of premiums unearned.
Other
Income
Other income consists primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products and fee income derived by the Company from
its AMLI Realty Co. subsidiary. Income is recognized as services
are provided.
Underwriting,
Policy Acquisition Costs and Insurance Expenses
Underwriting, policy acquisition costs and insurance expenses
consist of direct expenses incurred across all insurance lines
in connection with issuance, maintenance and administration of
in-force insurance policies, including amortization of deferred
policy acquisition costs, commissions paid to agents,
administrative expenses and premium taxes.
Other
Expenses
Other expenses consist primarily of direct expenses incurred by
the Company in connection with generating other income at the
SEA Division. Also included among other expenses in 2005 and
2006 are the incremental costs associated with the Merger
transaction in the amount of $9.1 million and
$48.0 million, respectively.
Variable
Stock-Based Compensation Expense
The Company sponsors a series of stock accumulation plans
established for the benefit of the independent insurance agents
and independent sales representatives associated with its
independent agent field forces, including UGA
Association Field Services and Cornerstone America. In
connection with these plans, the Company has from time to time
recorded and will continue to record non-cash variable
stock-based compensation expense (benefit) in amounts that
depend and fluctuate based upon the fair value of the
Companys common stock. See Note Q.
Reinsurance
Insurance liabilities are reported before the effects of ceded
reinsurance. Reinsurance receivables and prepaid reinsurance
premiums are reported as assets. The cost of reinsurance is
accounted for over the terms of the underlying reinsured
policies using assumptions consistent with those used to account
for the policies.
Advertising
Expense
The Company incurred advertising costs not included in deferred
acquisition costs of $1.6 million, $1.8 million and
$1.9 million in 2006, 2005 and 2004, respectively.
Advertising costs not included in deferred acquisition costs
F-15
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are expensed as incurred. These amounts are reflected in the
Companys consolidated statement of operations under the
caption Underwriting, policy acquisition costs and
insurance expenses.
Federal
Income Taxes
Deferred income taxes are recorded to reflect the tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each
year-end. In the event that the Company were to determine that
it would not be able to realize all or part of its net deferred
tax asset in the future, a valuation allowance would be recorded
to reduce its deferred tax assets to the amount that it believes
is more likely than not to be realized. Recording a valuation
allowance would result in a charge to income in the period such
determination was made. The Company considers future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the continued need for the recorded valuation
allowance. In the event the Company determines that it would be
able to realize its deferred tax assets in the future in excess
of its net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was
made.
Comprehensive
Income
Included in comprehensive income is the reclassification
adjustments for realized gain (losses) included in net income of
$(2.3) million ($(1.5 million) net of tax),
$(1.2) million ($(768,000) net of tax), and
$4.3 million ($2.8 million net of tax) in 2006, 2005
and 2004, respectively.
Guaranty
Funds and Similar Assessments
The Company is assessed amounts by state guaranty funds to cover
losses of policyholders of insolvent or rehabilitated insurance
companies, by state insurance oversight agencies and by other
similar legislative entities to cover the operating expenses of
such agencies and entities. The Company is also assessed for
other health related expenses of high-risk and health
reinsurance pools maintained in the various states. These
mandatory assessments may be partially recovered through a
reduction in future premium taxes in certain states. At
December 31, 2006 and 2005, the Company had accrued
(reflected in Other liabilities on the
Companys consolidated balance sheet) $5.5 million to
cover the cost of these assessments. The Company expects to pay
these assessments over a period of up to five years, and the
Company expects to realize the allowable portion of the premium
tax offsets
and/or
policy surcharges over a period of up to 10 years. The
Company incurred guaranty fund and other health related
assessments in the amount of $6.2 million,
$6.6 million and $4.2 million in 2006, 2005 and 2004,
respectively, recorded in Underwriting, policy acquisition
costs and insurance expenses on the Companys
consolidated statement of operations.
2006
Change in Accounting Policy
Effective December 31, 2006, the Company changed its
accounting policy with respect to the amortization of a portion
of deferred acquisition costs associated with commissions paid
to agents.
The Company formerly capitalized commissions and premium taxes
associated with its SEA Division business (classified as
deferred acquisition costs (DAC)) and amortized all
of these costs over the period (and in proportion to the amount)
that the associated unearned premium is earned. The Company
utilized this accounting methodology in preparing its reported
2006 interim financial statements.
Following adoption of SEC Staff Accounting
Bulletin No. 108 (SAB 108), Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in the Current Year Financial Statements, the
Company recently performed an analysis to determine the
appropriate portion of commissions to be deferred over the lives
of the underlying policies. Generally, first year and second
year commission rates are higher than the renewal year
commission rates, and the Company has determined that the
preferred approach is to capitalize the excess commissions
associated with those earlier years and amortize the capitalized
costs ratably over the estimated life of
F-16
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the policy, rather than in the year the commissions were paid.
Accordingly, effective January 1, 2006 the Company has
elected to change its accounting methodology by amortizing the
first and second year excess commissions ratably over a two year
period (based on recent persistency studies showing that SEA
policies have an average life of 2.09 years).
The Company has elected to utilize the one time special
transition provisions of SAB 108 and recorded an adjustment
to retained earnings effective January 1, 2006 to reflect
this change in accounting policy with respect to the
capitalization and amortization of deferred acquisition costs
associated with excess first and second year commissions. As of
January 1, 2006, the change in accounting policy resulted
in an increase in the Companys capitalized deferred
acquisition cost (DAC) of $77.6 million, a related increase
to its deferred tax liability by $27.1 million, and a net
increase to shareholders equity of $50.5 million. The
adoption of this new accounting policy had the effect of
increasing reported underwriting, policy acquisition costs and
insurance expenses (classified to its SEA Division) in 2006 by
the amount of $15.5 million and, correspondingly, reducing
after-tax net income by $10.1 million.
Over time, the Companys prior accounting policy with
respect to amortization of the excess first and second year
commissions resulted in an understatement of an asset (by 4% in
2004 and by 3% in 2005) and shareholders equity (by
8% in 2004 and by 6% in 2005). In addition, had the Company in
prior periods properly deferred and amortized excess first and
second year commissions over the average policy life of two
years, the Companys previously reported 2005 net
income would have been reduced by $8.5 million (or by less
than 4%) and the Companys previously reported
2004 net income would have been reduced by $698,000 (or by
less than 1%). Prior to the adoption of SAB 108, the
Company has considered the guidance contained in SEC Staff
Accounting Bulletin No. 99, Materiality, using
the roll-over method (which has as its
primary focus the income statement, including the reversing
effect of prior year misstatements) and concluded that its
previously reported results of operations for the SEA Division
for the years ended 2003 through 2005 were not materially
distorted.
New
Accounting Pronouncements
In September 2006, the Securities and Exchange Commission Staff
issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial
Statements, or SAB 108, in an effort to address
diversity in the accounting practice of quantifying
misstatements and the potential for improper amounts on the
balance sheet. Prior to the issuance of SAB 108, the two
methods used for quantifying the effects of financial statement
errors were the roll-over and iron
curtain methods. Under the roll-over
method, the primary focus is the income statement, including
the reversing effect of prior year misstatements. The criticism
of this method is that misstatements can accumulate on the
balance sheet. On the other hand, the iron
curtain method focuses on the effect of correcting the
ending balance sheet, with less importance on the reversing
effects of prior year errors in the income statement.
SAB 108 establishes a dual approach,
which requires the quantification of the effect of financial
statement errors on each financial statement, as well as related
disclosures. Public companies are required to record the
cumulative effect of initially adopting the dual
approach method in the first year ending after
November 16, 2006 by recording any necessary corrections to
asset and liability balances with an offsetting adjustment to
the opening balance of retained earnings. The use of this
cumulative effect transition method also requires detailed
disclosures of the nature and amount of each error being
corrected and how and when they arose. The Company adopted
SAB 108 in the fourth quarter of 2006 and applied the
provisions of SAB 108 in connection with the change in
accounting policy with respect to the capitalization and
amortization of excess first and second year commissions
associated with the business of the Companys SEA Division.
See 2006 Change in Accounting Policy in
Note A. The adoption of SAB 108 did not have a
material impact on the Companys financial position,
results of operations or cash flows.
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement 157 Fair Value
Measurements, which defines fair value as the price that
would be received to sell an asset or that would be paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS 157
F-17
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Statement 157
will be effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company believes this
statement will not have a material effect upon the financial
condition or results of operations of the Company.
In June 2006, the FASB issued FASB Interpretation No. 48
(FIN 48) Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109
Accounting for Income Taxes. FIN 48 prescribes a
threshold for the financial statement recognition of tax
benefits from tax positions taken or to be taken in an income
tax return. For tax benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by
taxing authorities. The amount of a tax benefit recognized is
the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate
settlement of the tax position. Required disclosures will
include a tabular rollforward of the tax benefits that have not
been recognized in the financial statements. The cumulative
effect, if any, of adopting FIN 48 is to be recorded as an
adjustment to retained earnings at the beginning of the period
of adoption. FIN 48 is effective for the Company beginning
January 1, 2007. The Company does not expect FIN 48 to
have a material impact on its financial position or results of
operations.
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement 155 Accounting for
Certain Hybrid Financial Instruments. Statement 155
amends FASB Statement 133 Accounting for Derivative
Instruments and FASB Statement 140 Accounting for
Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities. Among other things, Statement 155
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation.
Statement 155 shall be effective for all financial
instruments acquired, issued, or subject to a remeasurement (new
basis) event occurring after the beginning of the fiscal year
after September 15, 2006 (or fiscal year 2007 for the
Company). The Company believes this statement will not have a
material effect upon the financial condition or results of
operations of the Company.
In 2005, the American Institute of Certified Public Accountants
issued Statement of Position (SOP)
05-1,
Accounting by Insurance Enterprises for Deferred Acquisition
Costs in Connection With Modifications or Exchanges of Insurance
Contracts, for implementation in the first quarter of 2007.
The SOP requires that deferred acquisition costs be expensed in
full when the original contract is substantially changed by
election or amendment of an existing contract feature or by
replacement with a new contract. The Company expects to
implement the SOP for contract changes beginning in the first
quarter of 2007 with no material effects to the financial
statements at implementation.
In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement 154 Accounting
Changes and Error Corrections which changes the requirements
for the accounting and reporting of a change in accounting
principle. Statement 154 applies to all voluntary changes
in accounting principle as well as to changes required by an
accounting pronouncement that does not include specific
transition provisions. Statement 154, as of January 1,
2006, requires that changes in accounting principle be
retrospectively applied. Under retrospective application, the
new accounting principle is applied as of the beginning of the
first period presented as if that principle had always been
used. The cumulative effect of the change is reflected in the
carrying value of assets and liabilities as of the first period
presented and the offsetting adjustments would be recorded to
opening retained earnings. Statement 154 replaces APB
Opinion No. 20 and FASB Statement 3.
Statement 154 is effective for the Company beginning in
fiscal year 2006.
FASB Statement 123R (revised 2004), Share-Based
Payment, became effective for the Company on January 1,
2006. Statement 123R requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair
values, a previously optional accounting method that the Company
voluntarily adopted in 2003. The Company adopted
Statement 123R using the modified prospective transition
method, whereby compensation cost related to unvested awards as
of the effective date are recognized as calculated for inclusion
in the financial statements and pro forma disclosures under FASB
Statement 123, and cost
F-18
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to new awards are recognized in accordance with
Statement 123R. For 2006, the impact of the transition to
Statement 123R to the Companys income from continuing
operations net of income taxes was $27,000.
The following table illustrates the effect on net income as if
the fair-value-based method had been applied to all outstanding
and unvested option awards in each period.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net income, as reported
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
Add: stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
654
|
|
|
|
93
|
|
(Deduct)/Add total stock-based
employee compensation (expense) benefit determined under
fair-value-based method for all awards, net of tax
|
|
|
(682
|
)
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
203,473
|
|
|
$
|
161,811
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
Basic-pro forma
|
|
$
|
4.41
|
|
|
$
|
3.51
|
|
Diluted as reported
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
Diluted-pro forma
|
|
$
|
4.32
|
|
|
$
|
3.41
|
|
Reclassification
Certain amounts in the 2005 and 2004 financial statements have
been reclassified to conform to the 2006 financial statement
presentation. In particular, the Company has, for financial
reporting purposes, reclassified for all periods presented
certain revenue and expenses related to the Companys
former College Fund Life Division student loan operation
from the Life Division to Other Key Factors.
Note B
Merger Completed
On April 5, 2006, HealthMarkets, Inc. completed a merger
(the Merger) providing for the acquisition of the
Company by affiliates of a group of private equity investors,
including The Blackstone Group, Goldman Sachs Capital Partners
and DLJ Merchant Banking Partners. In the Merger, holders of
record on April 5, 2006 of HealthMarkets common shares
(other than shares held by certain members of management and
shares held through HealthMarkets agent stock accumulation
plans) received $37.00 in cash per share.
In the transaction, HealthMarkets former public
shareholders received aggregate cash consideration of
approximately $1.6 billion, of which approximately
$985.0 million was contributed as equity by the private
equity investors. The balance of the merger consideration was
financed with the proceeds of a $500.0 million term loan
facility extended by a group of banks, the proceeds of
$100.0 million of trust preferred securities issued in a
private placement and Company cash on hand in the amount of
approximately $42.8 million. See Note I.
The Company accounted for the Merger as a leveraged
recapitalization, whereby the historical book value of the
assets and liabilities of the Company was maintained. In
connection with the Merger, the Company transferred
substantially all of its assets and liabilities to
HealthMarkets, LLC, a direct wholly-owned subsidiary of the
Company.
During the second quarter of 2006, the Company utilized cash in
the amount of approximately $120.9 million for professional
fees and expenses associated with the Merger. Of this total cash
expended, $47.3 million ($38.2 million, net of tax)
was expensed and charged to income in the second quarter of 2006
(which expenses are reflected under the caption Other
expenses on the Companys Consolidated Statement of
Operations),
F-19
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$31.7 million of fees and expenses related to raising
equity in the Merger was reflected as a direct reduction in
stockholders equity, and $41.9 million
($9.4 million of prepaid monitoring fees and
$32.5 million of capitalized financing costs attributable
to the issuance of the debt in the Merger) was capitalized
(which capitalized financing costs are reflected under the
caption Other assets on the Companys
Consolidated Balance Sheet). As of December 31, 2006 all of
the prepaid monitoring fees and $6.3 million of the
capitalized financing cost had been amortized. See
Note I. The Company did not incur any additional Merger
transaction costs through the remainder of 2006.
Note C
Acquisitions and Dispositions
Acquisitions
Termination
of SIR Obligation
On March 3, 1997, the Company and Special Investment Risks,
Limited (SIR) entered into a Sale of Assets
Agreement (as amended by Amendments Nos. 1, 2, 3 and 4
thereto), effective as of January 1, 1997 (the Asset
Sale Agreement), providing for the transfer and sale to
the Company of substantially all of the equipment, fixed assets
and contracts associated with SIRs former United Group
Association, Inc., a general insurance agency. In partial
consideration for the transfer and sale made in accordance with
the terms of the Asset Sale Agreement, (i) SIR retained the
right to receive all commissions on policies marketed and sold
by SIR and written prior to January 1, 1997 and (ii), with
respect to policies marketed and sold by SIR and written after
January 1, 1997, the Company agreed to pay to SIR
120 basis points (1.20%) times the UGA Commissionable
Renewal Premium Revenue (as such term is defined in the Asset
Sale Agreement) collected in any period (such streams of
payments owing to SIR collectively referred to as the
Future Obligation).
On May 19, 2006, the Company and SIR executed a Termination
Agreement, pursuant to which (a) SIR received an aggregate
of $47.5 million, (b) the Future Obligation was
discharged in full, (c) SIR released the Company and
certain of its subsidiaries from all liability under the Asset
Sale Agreement, and (d) the Asset Sale Agreement was
terminated. In addition, the Company and SIR agreed,
respectively, to indemnify the other party for all losses,
damages and other liabilities incurred in connection with the
breach of any covenant, agreement, representation or warranty
made by the respective party under the terms of the Termination
Agreement. The Company recorded the transaction as additional
purchase price and allocated such additional purchase price to
Goodwill and other intangible assets on the Companys
Consolidated Balance Sheet. The Company will amortize the
intangible asset over an approximate period of twenty-five years
based on estimated future cash flows associated with the related
premium stream.
SIR is owned by the estate of Mr. Ronald L. Jensen.
Mr. Jensen was the founder and former Chairman of the
Company.
Acquisition
of HealthMarket Inc.
On October 8, 2004, the Company completed an acquisition,
for a cash purchase price of $53.1 million, of
substantially all of the operating assets of HealthMarket Inc.,
a Norwalk, Connecticut-based provider of consumer driven health
plans (CDHPs) to the small business (2 to 200 employees)
marketplace. In the acquisition, MEGA acquired
HealthMarkets administrative platform and substantially
all of HealthMarkets CDHP technology, fixed assets and
personnel. In the transaction, HealthMarket retained ownership
of American Travelers Assurance Company (ATAC), a
wholly owned insurance subsidiary of HealthMarket. As part of
the acquisition, Chesapeake entered into an assumption
reinsurance agreement with HealthMarket and ATAC, pursuant to
which Chesapeake agreed to pay a contingent renewal fee to
HealthMarket. This renewal fee has been and will be reflected as
goodwill
and/or other
intangible assets, as and when Chesapeake issues a renewal
policy to a former ATAC policyholder.
For financial reporting purposes, the HealthMarket transaction
was accounted for using the purchase method of accounting, and,
as a result, the assets and liabilities acquired were recorded
at fair value on the dates acquired,
F-20
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and the Consolidated Statement of Operations includes the
results of operations of HealthMarket from the date of
acquisition. The effect of this acquisition on the
Companys results of operations was not material, and,
accordingly, pro forma financial information has not been
presented. In connection with the HealthMarket acquisition
agreement and assumption reinsurance agreement, the Company had
recorded goodwill and other intangible assets in the aggregate
amount of $31.3 million at December 31, 2004. During
2005, the Company recorded an additional $7.1 million in
goodwill and other intangible assets related to the assumption
reinsurance agreement.
Dispositions
2006 Sale
of Star HRG
On July 11, 2006, the Company completed the sale of
substantially all of the assets formerly comprising MEGAs
Star HRG operations. Star HRG, based in Phoenix, Arizona, is a
provider of voluntary, limited benefit, low-cost health plans
and other employee benefits coverage for hourly and part-time
workers and their families. In connection with the sale of Star
HRG, the Company recognized in 2006 a pre-tax gain in the amount
of approximately $101.5 million.
As consideration for the receipt of Star HRG assets, a unit of
the CIGNA Corporation issued a promissory note to MEGA in the
principal amount of $150.8 million (the CIGNA
Note) and the CIGNA Corporation entered into a Guaranty
Agreement with MEGA, pursuant to which the CIGNA Corporation
unconditionally guaranteed the payment when due of the CIGNA
Note. The CIGNA Note required a principal payment of
$72.4 million (which was due and paid on November 1,
2006), with the remaining principal amount of $78.4 million
due on June 15, 2021. The CIGNA Note initially bore
interest at an annual rate of 5.4% from its inception to
August 2, 2006. After August 2, 2006, the portion of
the CIGNA Note payable on November 1, 2006 bore interest at
an annual rate of 5.4%, while the remaining principal amount
bears interest at an annual rate of 6.37%. The interest is to be
paid semi-annually on June 15th and
December 15th of each year. On August 16, 2006,
MEGA subsequently distributed the CIGNA Note and guaranty to
HealthMarkets, LLC as a dividend in kind, and HealthMarkets,
LLC, in turn, contributed the CIGNA Note and guaranty to a
non-consolidated qualifying special purpose entity of the
Company. See Note L.
For financial reporting purposes, the Company has reflected the
historical results of operations of its Star HRG unit in
continuing operations and classified in its Disposed Operations
business segment for all periods presented.
As part of the sale transaction, MEGA and Chesapeake entered
into 100% coinsurance arrangements with the purchaser, pursuant
to which (a) the purchaser agreed to assume liability for
all future claims associated with the Star HRG block of group
accident and health insurance policies in force as of the
closing date and (b) MEGA and Chesapeake transferred to the
purchaser cash in an aggregate amount equal to the actuarial
estimate of those future claims. In accordance with the terms of
separate administrative services agreements, a unit of CIGNA
Corporation has agreed to provide all administrative services,
in the name of and on behalf of MEGA and Chesapeake, with
respect to the in-force block of Star HRG business. While under
the terms of the coinsurance agreements MEGA and Chesapeake have
ceded liability for all future claims made on the insurance
policies in force at the closing date, MEGA and Chesapeake
remain primarily liable on those policies. Accordingly, for
financial reporting purposes, at December 31, 2006 the
Company has reflected and will continue to reflect the policy
liabilities ceded to and assumed by the purchaser under the
coinsurance agreement as Policy liabilities on its
Consolidated Balance Sheet, with a corresponding amount recorded
as an asset as a Reinsurance receivable on its
Consolidated Balance Sheet.
In addition, for financial reporting purposes the Company will
continue to report in future periods the residual results of
operations of the business (anticipated to consist solely of
residual wind-down expenses and any
true-up
items associated with the sale) in continuing operations and
classified to the Companys Disposed Operations business
segment.
F-21
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a balance sheet for the Star HRG operations
as of December 31, 2005:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
Due premiums
|
|
$
|
12,818
|
|
Reinsurance receivable
|
|
|
26
|
|
Goodwill
|
|
|
37,256
|
|
Agents and other receivable
|
|
|
(1,013
|
)
|
Property and equipment, net
|
|
|
10,473
|
|
Other assets
|
|
|
484
|
|
|
|
|
|
|
Total assets
|
|
$
|
60,044
|
|
|
|
|
|
|
Liabilities and
Equity
|
|
|
|
|
Policy liabilities:
|
|
|
|
|
Claims
|
|
$
|
16,803
|
|
Other liabilities
|
|
|
489
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,292
|
|
Equity
|
|
|
42,752
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
60,044
|
|
|
|
|
|
|
2006 Sale
of Student Insurance Division
On December 1, 2006, the Company completed the sale of
substantially all of the assets formerly comprising MEGAs
Student Insurance Division. The Student Insurance Division
offers health insurance programs that generally provide single
school year coverage to individual students at colleges and
universities. The Student Insurance Division also provides
accident policies for students at public and private schools in
pre-kindergarten through grade twelve. In connection with the
sale of the Student Insurance Division, the Company recognized
in 2006 a pre-tax gain in the amount of approximately
$100.2 million.
As consideration for the sale of the Student Insurance Division
assets, the Company received a promissory note in the principal
amount of $94.8 million issued by UnitedHealth Group Inc.
(the UHG Note). The UHG Note bears interest at a
fixed rate of 5.36% and matures on November 30, 2016, with
the full principal payment due at maturity. The interest is to
be paid semi-annually on May 30th and
November 30th of each year. The Company has concluded that
the UHG Note meets the requirements established in FASB
Statement No. 115 Accounting for Certain Investments in
Debt and Equity Securities and may be classified as a
security with a fixed maturity. Accordingly, the Company has
reflected the UHG Note on the Companys consolidated
balance sheet under the caption Fixed maturities available
for sale.
For financial reporting purposes, the Company has reflected the
historical results of operations of former Student Insurance
Division in continuing operations and classified in its Disposed
Operations business segment for all periods presented.
The terms of the transaction provide that the purchase price is
subject to downward or upward adjustment based on the amount of
premium to be generated with respect to the
2007-2008
school year and actual claims experience with respect to the
in-force block of student insurance business at the time of the
sale. No adjustment was made at December 31, 2006 to the
purchase price related to the premium provision, and the Company
will continue to examine whether any adjustment should be made
in the future.
F-22
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As part of the sale transaction, MEGA, Mid-West and Chesapeake
entered into 100% coinsurance arrangements with the purchaser,
pursuant to which (a) the purchaser agreed to assume
liability for all future claims associated with the Student
Insurance Division block of group accident and health insurance
policies in force as of the closing date and (b) MEGA,
Mid-West and Chesapeake transferred to the purchaser cash in an
aggregate amount equal to the actuarial estimate of those future
claims. In accordance with the terms of separate administrative
services agreements, a unit of UnitedHealth Group has agreed to
provide all administrative services, in the name of and on
behalf of MEGA, Mid-West and Chesapeake, with respect to the
in-force block of Student Insurance Division business during the
coinsurance period. While under the terms of the coinsurance
agreements MEGA, Mid-West and Chesapeake have ceded liability
for all future claims made on the insurance policies in force at
the closing date, MEGA, Mid-West and Chesapeake remain primarily
liable on those policies. Accordingly, for financial reporting
purposes, at December 31, 2006 the Company has reflected
and will continue to reflect the policy liabilities ceded to and
assumed by the purchaser under the coinsurance agreement as
Policy liabilities on its Consolidated Balance
Sheet, with a corresponding amount recorded as an asset as a
Reinsurance receivable on its Consolidated Balance
Sheet.
In addition, the Company will continue to report in future
periods the residual results of operations of the business
(anticipated to consist solely of residual wind-down expenses
and any
true-up,
claw-back or earn-out items associated with the sale) in
continuing operations and classified to the Companys
Disposed Operations business segment.
Set forth below is a balance sheet for the Student Insurance
operations as of December 31, 2005:
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
Due premiums
|
|
$
|
33,586
|
|
Reinsurance receivable
|
|
|
3,642
|
|
Deferred acquisition costs
|
|
|
7,166
|
|
Accounts receivable and other
|
|
|
831
|
|
Property and equipment, net
|
|
|
2,575
|
|
|
|
|
|
|
Total assets
|
|
$
|
47,800
|
|
|
|
|
|
|
Liabilities and
Equity
|
|
|
|
|
Policy liabilities:
|
|
|
|
|
Claims
|
|
$
|
59,512
|
|
Unearned premiums
|
|
|
69,993
|
|
Accrued expenses
|
|
|
13,440
|
|
Other liabilities
|
|
|
1,677
|
|
|
|
|
|
|
Total liabilities
|
|
|
144,622
|
|
Equity
|
|
|
(96,822
|
)
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
47,800
|
|
|
|
|
|
|
Other
Dispositions
On March 31, 2004, the Company completed the sale of all of
the remaining uninsured student loan assets that had been
retained by the Company at the November 18, 2003 sale of
its former Academic Management Services Corp. (AMS)
unit. The sale in 2004 of the uninsured student loans generated
gross cash proceeds in the amount of approximately
$25.0 million.
F-23
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note D
Investments
A summary of net investment income is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Fixed maturities
|
|
$
|
70,998
|
|
|
$
|
76,418
|
|
|
$
|
73,453
|
|
Equity securities
|
|
|
154
|
|
|
|
89
|
|
|
|
535
|
|
Mortgage loans
|
|
|
96
|
|
|
|
227
|
|
|
|
367
|
|
Policy loans
|
|
|
947
|
|
|
|
1,051
|
|
|
|
1,184
|
|
Short-term and other investments
|
|
|
19,505
|
|
|
|
9,778
|
|
|
|
1,797
|
|
Agents receivables
|
|
|
3,649
|
|
|
|
3,692
|
|
|
|
3,583
|
|
Student loans
|
|
|
10,721
|
|
|
|
8,692
|
|
|
|
6,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,070
|
|
|
|
99,947
|
|
|
|
87,608
|
|
Less investment expenses
|
|
|
1,923
|
|
|
|
2,159
|
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,147
|
|
|
$
|
97,788
|
|
|
$
|
85,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and (losses) and the change in unrealized
investment gains and (losses) on fixed maturity and equity
security investments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
Other
|
|
|
(Losses) on
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Investments
|
|
|
Investments
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Year Ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
(2,264
|
)
|
|
$
|
(32
|
)
|
|
$
|
202,840
|
|
|
$
|
200,544
|
|
Change in unrealized
|
|
|
(4,997
|
)
|
|
|
196
|
|
|
|
|
|
|
|
(4,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(7,261
|
)
|
|
$
|
164
|
|
|
$
|
202,840
|
|
|
$
|
195,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
(1,192
|
)
|
|
$
|
10
|
|
|
$
|
422
|
|
|
$
|
(760
|
)
|
Change in unrealized
|
|
|
(42,902
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
(43,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(44,094
|
)
|
|
$
|
(104
|
)
|
|
$
|
422
|
|
|
$
|
(43,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
731
|
|
|
$
|
3,570
|
|
|
$
|
2,370
|
|
|
$
|
6,671
|
|
Change in unrealized
|
|
|
(3,972
|
)
|
|
|
(2,905
|
)
|
|
|
|
|
|
|
(6,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(3,241
|
)
|
|
$
|
665
|
|
|
$
|
2,370
|
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized investment gains pertaining to equity
securities were $36,000, $28,000 and $28,000, at
December 31, 2006, 2005 and 2004, respectively. Gross
unrealized investment losses pertaining to equity securities
were $2.2 million, $189,000 and $75,000 at
December 31, 2006, 2005 and 2004, respectively.
F-24
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and fair value of investments in fixed
maturities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
73,872
|
|
|
$
|
137
|
|
|
$
|
(726
|
)
|
|
$
|
73,283
|
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
229,818
|
|
|
|
392
|
|
|
|
(4,810
|
)
|
|
|
225,400
|
|
Other mortgage and asset backed
securities
|
|
|
160,983
|
|
|
|
459
|
|
|
|
(3,136
|
)
|
|
|
158,306
|
|
Other corporate bonds
|
|
|
919,603
|
|
|
|
9,008
|
|
|
|
(16,034
|
)
|
|
|
912,577
|
|
Other
|
|
|
6,999
|
|
|
|
|
|
|
|
(2,162
|
)
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,391,275
|
|
|
$
|
9,996
|
|
|
$
|
(26,868
|
)
|
|
$
|
1,374,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
87,003
|
|
|
$
|
62
|
|
|
$
|
(1,137
|
)
|
|
$
|
85,928
|
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
251,418
|
|
|
|
634
|
|
|
|
(4,201
|
)
|
|
|
247,851
|
|
Other mortgage and asset backed
securities
|
|
|
184,557
|
|
|
|
1,174
|
|
|
|
(3,565
|
)
|
|
|
182,166
|
|
Other corporate bonds
|
|
|
973,362
|
|
|
|
12,980
|
|
|
|
(17,822
|
)
|
|
|
968,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,496,340
|
|
|
$
|
14,850
|
|
|
$
|
(26,725
|
)
|
|
$
|
1,484,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values for fixed maturity securities are based on quoted
market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values
obtained from quotation services.
As of December 31, 2006, the largest concentration in any
one investment grade corporate bond was $94.8 million,
which represented 5.3% of total invested assets. This security
was received as payment on the sale of the Student Division. The
Company has taken out $75.0 million of credit default
insurance on this bond, reducing its default exposure to
$19.8 million, or 1.1% of total invested assets.
F-25
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and fair value of fixed maturities at
December 31, 2006, 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.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Maturity:
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
90,750
|
|
|
$
|
90,556
|
|
Over 1 year through
5 years
|
|
|
331,910
|
|
|
|
327,593
|
|
Over 5 years through
10 years
|
|
|
347,175
|
|
|
|
343,768
|
|
Over 10 years
|
|
|
230,639
|
|
|
|
228,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000,474
|
|
|
|
990,697
|
|
Mortgage and asset backed
securities
|
|
|
390,801
|
|
|
|
383,706
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,391,275
|
|
|
$
|
1,374,403
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale and call of investments in fixed
maturities were $225.4 million, $181.8 million and
$177.4 million for 2006, 2005 and 2004, respectively. Gross
gains of $2.6 million, $4.6 million and
$5.4 million, and gross losses of $2.5 million,
$1.7 million and $1.1 million were realized on the
sale and call of fixed maturity investments during 2006, 2005
and 2004, respectively.
Proceeds from the sale of equity investments were
$1.5 million, $10,000 and $17.3 million for 2006, 2005
and 2004, respectively. Gross gains of $-0-, $10,000 and
$3.6 million and gross losses of $32,000, $-0- and $-0-
were realized on sales of equity investments during 2006, 2005
and 2004, respectively.
Set forth below is a summary of the Companys equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Common stocks
non-affiliate
|
|
$
|
283
|
|
|
$
|
318
|
|
|
$
|
1,508
|
|
|
$
|
1,347
|
|
The fair value, which represents carrying amounts of equity
securities, is based on quoted market prices.
The carrying amounts of the Companys investments in
mortgage loans approximate fair value, which is estimated using
a discounted cash flow analysis, utilizing a discount rate equal
to the rate currently being offered for similar loans to
borrowers with similar credit ratings. The carrying values for
mortgage loans are net of allowance of $33,000 and $55,000 at
December 31, 2006 and 2005, respectively.
The carrying amounts of the Companys investment in policy
loans approximate fair value which is estimated using discounted
cash flow analysis at a rate for similar loans at contractual
rates for policy loans from currently marketed policies.
The Company minimizes its credit risk associated with its fixed
maturities portfolio by investing primarily in investment grade
securities. Included in fixed maturities is a concentration of
mortgage and asset backed securities. At December 31, 2006,
the Company had a carrying amount of $383.7 million of
mortgage and asset backed securities, of which
$225.4 million were government backed, $130.0 million
were rated AAA, $2.4 million were rated AA,
$18.0 million were rated A, $7.4 million were rated
BBB, and $467,000 were rated below investment grade by external
rating agencies. At December 31, 2005, the Company had a
carrying amount of $430.0 million of mortgage and asset
backed securities, of which $247.9 million were government
backed, $158.1 million were rated AAA, $2.7 million
were rated AA, $14.2 million were rated A,
$4.8 million were rated BBB, and $2.3 million were
rated below investment grade by external rating agencies.
F-26
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, 2005 and 2004, the Company recorded impairment
charges for certain fixed maturities in the amount of
$2.4 million, $4.1 million and $3.6 million,
respectively. There were no impairment charges on equity
securities. The impairment charges are reflected in the
Companys consolidated statement of operations under the
caption Gains (losses) on sale of investments.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
20,353
|
|
|
$
|
75
|
|
|
$
|
36,149
|
|
|
$
|
651
|
|
|
$
|
56,502
|
|
|
$
|
726
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
26,399
|
|
|
|
143
|
|
|
|
179,551
|
|
|
|
4,667
|
|
|
|
205,950
|
|
|
|
4,810
|
|
Other mortgage and asset backed
securities
|
|
|
24,064
|
|
|
|
108
|
|
|
|
111,058
|
|
|
|
3,028
|
|
|
|
135,122
|
|
|
|
3,136
|
|
Corporate bonds
|
|
|
91,868
|
|
|
|
512
|
|
|
|
343,231
|
|
|
|
15,522
|
|
|
|
435,099
|
|
|
|
16,034
|
|
Other
|
|
|
4,837
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
4,837
|
|
|
|
2,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
167,521
|
|
|
$
|
3,000
|
|
|
$
|
669,989
|
|
|
$
|
23,868
|
|
|
$
|
837,510
|
|
|
$
|
26,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006, the Company had $26.9 million of
unrealized losses in its fixed maturities portfolio. Of the
$3.0 million in unrealized losses that have existed for
less than twelve months, all but a single security have
unrealized losses of less than 2% of cost. The single security
(which consists of the Companys residual interest in
Grapevine Finance LLC and which has been classified as
Other in the table above) had at December 31,
2006 an unrealized loss of $2.2 million, or 30.9% of cost.
See Notes C and L of Notes to Consolidated Financial
Statements. The Company believes that the cash flows received
from the security have not changed from those that were expected
when the securitization was completed in 2006. Of the
$23.9 million in unrealized losses that have existed for
twelve months or longer, eight securities had an unrealized loss
in excess of 10% of the securitys cost. The amount of
unrealized loss with respect to those securities was
$4.9 million at December 31, 2006. The Company
continually monitors these investments and believes that, as of
December 31, 2006, the unrealized loss in these investments
is temporary.
At December 31, 2006, the Company had no unrealized losses
in its equity securities portfolio.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
61,872
|
|
|
$
|
747
|
|
|
$
|
13,632
|
|
|
$
|
390
|
|
|
$
|
75,504
|
|
|
$
|
1,137
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
145,168
|
|
|
|
2,077
|
|
|
|
68,632
|
|
|
|
2,124
|
|
|
|
213,800
|
|
|
|
4,201
|
|
Other mortgage and asset backed
securities
|
|
|
67,635
|
|
|
|
947
|
|
|
|
78,020
|
|
|
|
2,618
|
|
|
|
145,655
|
|
|
|
3,565
|
|
Corporate bonds
|
|
|
380,079
|
|
|
|
7,642
|
|
|
|
260,044
|
|
|
|
10,180
|
|
|
|
640,123
|
|
|
|
17,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
654,754
|
|
|
$
|
11,413
|
|
|
$
|
420,328
|
|
|
$
|
15,312
|
|
|
$
|
1,075,082
|
|
|
$
|
26,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company regularly monitors its investment portfolio to
attempt to minimize its concentration of credit risk in any
single issuer. Set forth in the table below is a schedule of all
investments representing greater than 1% of the Companys
aggregate investment portfolio at December 31, 2006 and
2005, excluding U.S. Government securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Issuer Fixed
Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UnitedHealth Group(1)
|
|
$
|
94,763
|
|
|
|
5.3
|
%
|
|
$
|
|
|
|
|
|
%
|
Federal National Mortgage
Corporation
|
|
|
17,992
|
|
|
|
1.0
|
%
|
|
|
25,370
|
|
|
|
1.4
|
%
|
Issuer Short-term
investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money
Market Fund(2)
|
|
$
|
325,677
|
|
|
|
18.1
|
%
|
|
$
|
200,900
|
|
|
|
11.3
|
%
|
|
|
|
(1) |
|
Represents security received from the purchaser as consideration
upon sale of the Companys former Student Insurance
Division on December 1, 2006. The Company has taken out
$75.0 million of credit default insurance on this security,
reducing the Companys default exposure to
$19.8 million. See Note C of Notes to
Consolidated Financial Statements. |
|
(2) |
|
The Fidelity Institutional Money Market Fund is a diversified
institutional money market fund that invests solely in high
quality United States dollar denominated money market securities
of domestic and foreign issuers. |
Under the terms of various reinsurance agreements (see
Note H), the Company is required to maintain assets in
escrow with a fair value equal to the statutory reserves assumed
under the reinsurance agreements. Under these agreements, the
Company had on deposit, securities with a fair value of
approximately $51.8 million and $57.3 million as of
December 31, 2006 and 2005, respectively. In addition,
domestic insurance subsidiaries had securities with a fair value
of $19.2 million and $17.1 million on deposit with
insurance departments in various states at December 31,
2006 and 2005, respectively.
In 2005, the Company established a securities lending program,
under which the Company lends fixed-maturity securities to
financial institutions in short-term lending transactions. The
Company maintains effective control over the loaned securities
by virtue of the ability to unilaterally cause the holder to
return the loaned security on demand. These securities continue
to be carried as investment assets on the Companys balance
sheet during the term of the loans and are not reported as
sales. The Companys security lending policy requires that
the fair value of the cash and securities received as collateral
be 102% or more of the fair value of the loaned securities. The
collateral received is restricted and cannot be used by the
Company unless the borrower defaults under the terms of the
agreement. These short-term security lending arrangements
increase investment income with minimal risk. At
December 31, 2006 and 2005, securities on loan to various
borrowers totaled $227.8 million and $45.4 million,
respectively.
Note E
Student Loans
The Company holds alternative (i.e., non-federally
guaranteed) student loans extended to students at selected
colleges and universities. These loans were initially generated
under the Companys College First Alternative Loan program.
The student loans guaranteed by private insurers are guaranteed
100% as to principal and accrued interest.
F-28
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a summary of the student loans held by the
Company at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Student loans
guaranteed by private insurers
|
|
$
|
80,615
|
|
|
$
|
80,615
|
|
|
$
|
83,179
|
|
|
$
|
83,179
|
|
Student loans
non-guaranteed
|
|
|
28,487
|
|
|
|
27,348
|
|
|
|
29,351
|
|
|
|
28,178
|
|
Allowance for losses
|
|
|
(3,256
|
)
|
|
|
|
|
|
|
(2,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans
|
|
$
|
105,846
|
|
|
$
|
107,963
|
|
|
$
|
109,808
|
|
|
$
|
111,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the aggregate $105.8 million and $109.8 million
carrying amount of student loans held by the Company at
December 31, 2006 and 2005, $105.4 million and
$109.6 million, respectively, were pledged to secure
payment of secured student loan indebtedness. See
Note J.
The Company estimates the fair value of student loans based on
values of recent sales of student loans from the Company into
the secured student loan credit facility. See Note J.
The Companys provision for losses on student loans is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
2,722
|
|
|
$
|
3,608
|
|
|
$
|
1,676
|
|
Change in provision for losses
|
|
|
534
|
|
|
|
(886
|
)
|
|
|
1,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
3,256
|
|
|
$
|
2,722
|
|
|
$
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized interest income from continuing
operations from the student loans of $10.7 million,
$8.7 million and $6.7 million in 2006, 2005 and 2004,
respectively, which is included in the investment income
category on the Companys consolidated statements of
operations.
Note F
Goodwill and Other Intangible Assets
Set forth in the tables below is a summary of the goodwill and
other intangible assets by operating division as of
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
43,997
|
|
|
$
|
51,239
|
|
|
$
|
(8,724
|
)
|
|
$
|
86,512
|
|
Life Insurance Division
|
|
|
552
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,549
|
|
|
$
|
51,239
|
|
|
$
|
(8,917
|
)
|
|
$
|
86,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
44,049
|
|
|
$
|
3,788
|
|
|
$
|
(6,673
|
)
|
|
$
|
41,164
|
|
Star HRG
|
|
|
33,640
|
|
|
|
8,858
|
|
|
|
(5,242
|
)
|
|
|
37,256
|
|
Life Insurance Division
|
|
|
552
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
359
|
|
Other Key Factors
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,466
|
|
|
$
|
12,646
|
|
|
$
|
(12,108
|
)
|
|
$
|
79,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets consist of customer lists, trademark and
non-compete agreements related to the acquisitions of
HealthMarket (completed in October 2004) and acquisition of
Specialized Investment Risk rights to the renewal commissions at
the Self Employed Agency Division. See Note C.
The Company recorded amortization expense associated with other
intangibles in continuing operations in the amount of
$2.5 million, $3.7 million and $1.3 million in
2006, 2005 and 2004, respectively. Amortization expense in 2006
and 2005 included impairment charges in the amount of $496,000
and $1.7 million, respectively, related to the HealthMarket
customer list acquired in October 2004.
Set forth in the table below is a summary of the estimated
amortization expense for the next five years and thereafter for
other intangible assets:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
1,721
|
|
2008
|
|
|
1,639
|
|
2009
|
|
|
1,582
|
|
2010
|
|
|
1,525
|
|
2011
|
|
|
1,532
|
|
2012 and thereafter
|
|
|
38,488
|
|
|
|
|
|
|
|
|
$
|
46,487
|
|
|
|
|
|
|
Note G
Policy Liabilities
As more fully described below, policy liabilities consist of
future policy and contract benefits, claim liabilities, unearned
premiums and other policy liabilities.
Future
Policy and Contract Benefits
Liability for future policy and contract benefits consisted of
the following at December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Accident & Health
|
|
$
|
98,639
|
|
|
$
|
94,124
|
|
Life
|
|
|
250,615
|
|
|
|
241,800
|
|
Annuity
|
|
|
104,461
|
|
|
|
112,068
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
453,715
|
|
|
$
|
447,992
|
|
|
|
|
|
|
|
|
|
|
F-30
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a detailed summary of benefits, claims and
settlement expenses net of reinsurance receivables for each of
the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Future liability and contract
benefits
|
|
$
|
28,282
|
|
|
$
|
25,409
|
|
|
$
|
29,394
|
|
Claims benefits
|
|
|
968,335
|
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, claims and
settlement expenses
|
|
$
|
996,617
|
|
|
$
|
1,092,136
|
|
|
$
|
1,134,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
and Health Policies
With respect to accident and health insurance, future policy
benefits are primarily attributable to a
return-of-premium
(ROP) rider that the Company has issued with certain health
policies. Pursuant to this rider, the Company undertakes to
return to the policyholder on or after age 65 all premiums
paid less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. The Company records an ROP
liability to fund longer-term obligations associated with the
ROP rider. The future policy benefits for the ROP are computed
using the net level premium method using assumptions with
respect to current investment yield, mortality and withdrawal
rates, and annual increases in future gross premiums determined
to be appropriate at the time the business was first acquired by
the Company, with an implicit margin for adverse deviations. A
claim offset for actual benefits paid through the reporting date
is applied to the ROP liability for all policies on a
contract-by-contract
basis. The ROP liabilities reflected in future policy and
contract benefits on the Companys consolidated balance
sheet were $93.4 million and $88.1 million at
December 31, 2006 and 2005, respectively.
The remainder of the future policy benefits for accident and
health are principally contract reserves on issue-age rated
policies, reserves for other riders providing future benefits,
and reserves for the refund of a portion of premium as required
by state law. These liabilities are typically calculated as the
present value of future benefits less the present value of
future net premiums, computed on a net level premium basis using
assumptions determined to be appropriate as of the date the
business was acquired by the Company. These assumptions may
include current investment yield, mortality, withdrawal rates,
or other assumptions determined to be appropriate. Substantially
all accident and health insurance future policy benefit
liability interest assumptions range from 4.0% to 5.0%.
Life
Policies and Annuity Contracts
With respect to traditional life insurance, future policy
benefits are computed on a net level premium method using
assumptions with respect to current investment yield, mortality
and withdrawal rates determined to be appropriate as of the date
the business was acquired by the Company. Substantially all
liability interest assumptions range from 3.0% to 6.0%. Such
liabilities are graded to equal statutory values or cash values
prior to maturity.
Interest rates credited to future contract benefits related to
universal life-type contracts approximated 4.6% during each of
2006, 2005 and 2004. Interest rates credited to the liability
for future contract benefits related to direct annuity contracts
generally ranged from 3.0% to 5.5% during 2006, 2005 and 2004.
The Company has assumed certain life and annuity business from a
company, utilizing the same actuarial assumptions as the ceding
company. The liability for future policy benefits related to
life business has been calculated using an interest rate of 9%
graded to 5% over twenty years for life policies. Mortality and
withdrawal rates are based on published industry tables or
experience of the ceding company and include margins for adverse
deviation. Interest rates credited to the liability for future
contract benefits related to these annuity contracts generally
ranged from 3.0% to 4.5% during 2006, 2005 and 2004.
F-31
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Annuities
The carrying amounts and fair values of the Companys
liabilities for investment-type contracts (included in future
policy and contract benefits and other policy liabilities in the
consolidated balance sheets) at December 31, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Direct annuities
|
|
$
|
59,257
|
|
|
$
|
57,017
|
|
|
$
|
61,584
|
|
|
$
|
59,737
|
|
Assumed annuities
|
|
|
43,720
|
|
|
|
43,718
|
|
|
|
49,037
|
|
|
|
49,034
|
|
Supplemental contracts without
life contingencies
|
|
|
1,484
|
|
|
|
1,484
|
|
|
|
1,447
|
|
|
|
1,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104,461
|
|
|
$
|
102,219
|
|
|
$
|
112,068
|
|
|
$
|
110,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values under investment-type contracts consisting of direct
annuities and supplemental contracts without life contingencies
are estimated using the assumption-reinsurance pricing method,
based on estimating the amount of profits or losses an assuming
company would realize, and then discounting those amounts at a
current market interest rate. Fair values for the Companys
liabilities under assumed annuity investment-type contracts are
estimated using the cash surrender value of the annuity.
Claims
Liabilities
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
Consistent with overall company philosophy, the claim liability
estimate is determined which is expected to be adequate under
reasonably likely circumstances. This estimate is developed
using actuarial principles and assumptions that consider a
number of items as appropriate, including but not limited to
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. The Company does not develop ranges
in the setting of the claims liability reported in the financial
statements.
For the majority of health insurance products offered through
the Self-Employed Agency Division, the Company establishes the
claims liability using the original incurred date. Under the
original incurred date methodology, claims liabilities for the
cost of all medical services related to the accident or sickness
are recorded at 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. A break in service of more than six
months will result in the establishment of a new incurred date
for subsequent services. A new incurred date will be established
if claims payments continue for more than thirty-six months
without a six month break in service.
In estimating the ultimate level of claims for the most recent
incurral months, the Company uses what it believes are prudent
estimates that reflect the uncertainty involved in these
incurral months. An extensive degree of judgment is used in this
estimation process. For healthcare costs payable, the claim
liability balances and the related benefit expenses are highly
sensitive to changes in the assumptions used in the claims
liability calculations. With respect to health claims, the items
that have the greatest impact on the Companys financial
results are the medical cost trend, which is the rate of
increase in healthcare costs, and the unpredictable variability
in actual experience. Any adjustments to prior period claim
liabilities are included in the benefit expense of the period in
which adjustments are identified. Due to the considerable
variability of healthcare costs and actual experience,
adjustments to health claim liabilities usually occur each
quarter and are sometimes significant.
The SEA Division also makes various refinements to the claim
liabilities as appropriate. These refinements estimate
liabilities for circumstances, such as an excess pending claims
inventory (i.e., inventories of pending claims in excess
of historical levels) and disputed claims. For example, the
Company closely monitors the level of
F-32
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims that are pending. When the level of pending claims
appears to be in excess of normal levels, the
Company typically establishes a liability for excess pending
claims. The Company believes that such an excess pending
claims liability is appropriate under such circumstances
because of the operation of the developmental method used by the
Company to calculate the principal claim liability, which method
develops or completes paid claims to
estimate the claim liability. When the pending claims inventory
is higher than would ordinarily be expected, the level of paid
claims is correspondingly lower than would ordinarily be
expected. This lower level of paid claims, in turn, results in
the developmental method yielding a smaller claim liability than
would have been yielded with a normal level of paid claims,
resulting in the need for augmented claim liabilities.
With respect to Disposed Operations, the Company assigns
incurred dates based on the date of service. This definition
estimates the liability for all medical services received by the
insured prior to the end of the applicable financial period.
Appropriate adjustments are made in the completion factors to
account for pending claim inventory changes and contractual
continuation of coverage beyond the end of the financial period.
2006
Change in Claim Liability Estimates Self-Employed
Agency Division
Results for the year ended December 31, 2006, reflected a
benefit in the amount of $47.1 million attributable to
refinements of the Companys estimate for its claim
liability on its health insurance products. For financial
reporting purposes, each of these refinements is considered to
be a change in estimate, resulting from additional information
and subsequent developments from prior periods. Accordingly, the
financial impact of the refinements was accounted for in the
respective periods that the refinements occurred. Of the
$47.1 million of refinements to the estimated claim
liability, $44.5 million is attributable to prior years.
The refinements to the estimate for the Companys claim
liability are more particularly described below:
|
|
|
|
|
Approximately $11.2 million of the benefit (recorded in the
third quarter) was due to refinements of the estimate of the
unpaid claim liability for the most recent incurral months. The
calculation of the claim liability now distinguishes between
more mature products with reliable historical data and newer or
lower volume products that have not established a reliable
historical trend. Had this refinement been made at
December 31, 2005, the claim liability estimate would have
been reduced by $14.8 million.
|
|
|
|
An additional adjustment to the claim liability (approximately
$25.1 million, of which $10.5 million was recorded in
the third quarter and $14.6 million was recorded in the
fourth quarter) was attributable to an update of the completion
factors used in estimating the claim liability for the
Accumulated Covered Expense (ACE) rider, an optional
benefit rider available with certain scheduled/basic health
insurance products that provides for catastrophic coverage for
covered expenses under the contract that generally exceed
$100,000 or, in certain cases, $75,000. This rider pays benefits
at 100% after the stop loss amount is reached up to the
aggregate maximum amount of the contract for expenses covered by
the rider. This adjustment reflects both actual historical data
for the ACE rider and historical data derived from other
products. In 2005, the completion factors were calculated with
more emphasis placed on historical data derived from other
products since there was insufficient data related to the ACE
product rider to provide accurate and reliable completion
factors. Had these refinements been made at December 31,
2005, the claim liability estimate would have been reduced by
$19.1 million.
|
|
|
|
In the second quarter of 2006, the Company determined that
sufficient provision for large claims could be made within its
normal reserve process, eliminating the need for the separate
large claim reserve. This refinement resulted in a reduction in
the claim liability of $10.8 million. Had this refinement
been made at December 31, 2005, the claim liability
estimate would have been reduced by $10.6 million.
|
2005
Change in Claim Liability Estimates Self-Employed
Agency Division
Results at the SEA Division for the year ended December 31,
2005 reflected a benefit in the amount of $33.3 million
recorded in the third quarter of 2005 attributable to a
refinement of the Companys estimate for its
F-33
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claim liability on its health insurance products. The largest
portion of the adjustment (approximately $21.0 million) was
attributable to a refinement of the estimate of the unpaid claim
liability for the most recent incurral months. The Company
utilizes anticipated loss ratios to calculate the estimated
claim liability for the most recent incurral months. Despite
negligible premium rate increases implemented on its most
popular scheduled health insurance products, the SEA Division
has continued to observe favorable claims experience and, as a
result, loss ratios have not increased as rapidly as
anticipated. This favorable claims experience has been reflected
in the refinement of the anticipated loss ratios used in
estimating the unpaid claim liability for the most recent
incurral months. The remaining portion of the adjustment to the
claim liability (approximately $12.3 million) was
attributable to an update of the completion factors used in the
developmental method of estimating the unpaid claim liability to
reflect more current claims administration practices.
In addition, effective January 1, 2005, the Companys
SEA Division made certain refinements to its claim liability
calculations related to the ACE rider the effect of which
decreased claim liabilities and correspondingly increased
operating income in the amount of $7.6 million in the first
quarter of 2005. Prior to January 1, 2005, the SEA Division
utilized a technique that is commonly used to estimate claims
liabilities with respect to developing blocks of business, until
sufficient experience is obtained to allow more precise
estimates. The Company believed that the technique produced
appropriate reserve estimates in all prior periods. During the
first quarter of 2005, the Company believed that there were
sufficient claims paid on this benefit to produce a reserve
estimate utilizing the completion factor technique. As a result,
effective January 1, 2005, the SEA Division refined its
technique used to estimate claim liabilities to utilize
completion factors for older incurral dates. The technique
continues to utilize anticipated loss ratios in the most recent
incurral months. This completion factor technique utilized
historical data derived from other products since there was
insufficient data related to the ACE product rider to provide
accurate and reliable completion factors.
Activity in the claims liability is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Claims liability at beginning of
year
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
Less: Claims liability paid on
business disposed
|
|
|
(68,617
|
)
|
|
|
|
|
|
|
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred losses, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,059,032
|
|
|
|
1,191,723
|
|
|
|
1,196,421
|
|
Prior years
|
|
|
(90,697
|
)
|
|
|
(124,996
|
)
|
|
|
(90,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses, net of
reinsurance
|
|
|
968,335
|
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for claims, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
664,220
|
|
|
|
765,767
|
|
|
|
714,361
|
|
Prior years
|
|
|
336,949
|
|
|
|
365,738
|
|
|
|
343,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total payments for claims, net of
reinsurance
|
|
|
1,001,169
|
|
|
|
1,131,505
|
|
|
|
1,057,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability at end of year,
net of related reinsurance recoverable (2006
$72,582; 2005 $12,105; 2004 $11,808)
|
|
$
|
444,550
|
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Claims
Liability Development Experience
The Companys claim liabilities are estimated using the
developmental method, which involves the use of completion
factors for most incurral months, supplemented with additional
estimation techniques, such as loss ratio estimates, in the most
recent incurral months. This method applies completion factors
to claim payments in order to estimate the ultimate amount of
the claim. These completion factors are derived from historical
experience and are dependent on the incurred dates of the claim
payments. The completion factors are selected so that they are
equally likely to be redundant as deficient.
In estimating the ultimate level of claims for the most recent
incurral months, the Company uses what it believes are prudent
estimates that reflect the uncertainty involved in these
incurral months. Prior to the third quarter of 2005, the SEA
Divisions initial estimate of the claim liability was
based on the level of claims assumed in the establishment of
premium rates, since this represents the experience the SEA
Division expects to achieve on its products. For each product,
if there was evidence that this estimate was likely to prove
inadequate, such as recent prior experience or unusually high
paid claims in the most recent incurral months, then appropriate
adjustments were made to the assumptions used in the calculation
of the claim liability estimate. The tendency of these
techniques is to provide estimates that are more likely to be
redundant than deficient, but still provide for reasonable
estimates of the ultimate cost of settling the claims. Beginning
in the third quarter of 2005, the SEA Division revised its claim
liability estimation process in the most recent incurral months
to allow for reasonable downward adjustments in the loss ratio
estimate for products where there was credible evidence that
experience may run better than expected.
Set forth in the table below is a summary of the claims
liability development experience (favorable) unfavorable by
business unit in the Companys Insurance segment for each
of the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
(85,784
|
)
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
Life Insurance Division
|
|
|
(510
|
)
|
|
|
337
|
|
|
|
(926
|
)
|
Other Insurance
|
|
|
(2,530
|
)
|
|
|
805
|
|
|
|
1
|
|
Disposed Operations
|
|
|
(1,873
|
)
|
|
|
(4,776
|
)
|
|
|
1,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total favorable
|
|
$
|
(90,697
|
)
|
|
$
|
(124,996
|
)
|
|
$
|
(90,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on SEA Division. As indicated in the
table above, incurred losses developed at the SEA Division in
amounts less than originally anticipated due to
better-than-expected
experience on the health business in the SEA Division in each of
2006, 2005, and 2004.
F-35
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the SEA Division, the (favorable) unfavorable claims
liability development experience in the prior years
reserve for each of the years ended December 31, 2006,
2005, and 2004 is set forth in the table below by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Development in the most recent
incurral months
|
|
$
|
(35,504
|
)
|
|
$
|
(72,728
|
)
|
|
$
|
(42,947
|
)
|
Development in completion factors
|
|
|
(6,612
|
)
|
|
|
(21,095
|
)
|
|
|
(7,664
|
)
|
Development in large claim reserve
|
|
|
(10,555
|
)
|
|
|
(8,455
|
)
|
|
|
(5,425
|
)
|
Development in reserves for
regulatory and legal matters
|
|
|
(4,762
|
)
|
|
|
(6,971
|
)
|
|
|
18,906
|
|
Change in estimate for ACE rider
|
|
|
(24,165
|
)
|
|
|
(7,613
|
)
|
|
|
|
|
Other change in estimate as
disclosed below
|
|
|
|
|
|
|
|
|
|
|
(47,794
|
)
|
Other
|
|
|
(4,186
|
)
|
|
|
(4,500
|
)
|
|
|
(6,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (redundancy) inadequacy
|
|
$
|
(85,784
|
)
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As illustrated in the above table, considerable redundancies in
each year are associated with the estimate of claim liabilities
for the most recent incurral months. The Company has limited
data with respect to these most recent incurral months and,
accordingly, estimates are based primarily on anticipated
experience, taking into account the impact of the Companys
rate changes relative to expected medical trend. Since late
2003, the Company has severely reduced the level of rate
increases on its underlying scheduled health insurance coverage
in response to experience that has been more favorable than was
assumed in the establishment of the premium rates. This
favorable experience first appeared in incurred months in the
latter half of 2002, which with hindsight proved to be much more
favorable than prior experience would have suggested. At the end
of 2003 and again at the end of 2004, there appeared to be
evidence that loss ratios on these products were increasing
again toward the anticipated levels, though hindsight eventually
showed that much of this deterioration was the result of the
redundancy that had developed in the completion factors, which
were adjusted in the third quarter of 2005. Additional
adjustments were made in the third quarter of 2006 to reflect
this continuing favorable experience.
The total favorable claims liability development experience for
2006 in the amount of $85.8 million represented 19.5% of
total claim liabilities established for the SEA Division at
December 31, 2005. Most of the redundancy
($35.5 million, excluding a refinement to the claim
liability for the ACE rider described below) is attributable to
experience in the most recent incurral months developing more
favorably than anticipated. The Company also experienced a
redundancy attributable to the completion factors utilized of
$6.6 million (excluding the refinements in the ACE
completion factors in the third and fourth quarters of 2006
described below) as the result of claims developing in amounts
less than anticipated by the completion factors used at
December 31, 2005. Furthermore, the SEA Division also
benefited from a reduction in the claim liability of
$10.8 million in its reserve for large claims as a result
of a change in estimate recorded in the second quarter of 2006,
of which $10.6 million was attributable to prior years. In
addition, the Company experienced favorable development of
approximately $4.8 million associated with its reserves for
regulatory and legal matters due to settlements of certain
matters on terms more favorable than originally anticipated. In
2006, the Company made certain refinements to its estimate of
the claim liability for the ACE rider which contributed to the
favorable claims liability development experience for the year,
including revisions to the completion factors utilized in
computing this reserve as well as revisions to the estimate of
the unpaid claim liability for the most recent incurral months.
The impact of these refinements on the development of the claim
liabilities established at December 31, 2005 is
$24.2 million, including $19.1 million attributable to
the revised completion factors and $5.1 million
attributable to the estimate in the most recent incurral months.
The remaining favorable experience in 2006 in the claims
liability attributable to other issues was $4.2 million, or
1.0% of total claim liabilities established for the SEA Division
at December 31, 2005.
The total favorable claims liability development experience for
2005 in the amount of $121.4 million represented 24.6% of
total claim liabilities established for the SEA Division at
December 31, 2004. The favorable
F-36
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims liability development experience in 2005 reflected a
benefit of $33.3 million recorded in the third quarter of
2005 attributable to a refinement of the Companys estimate
for its claim liability on its health insurance products. This
adjustment resulted from a refinement of the estimate of the
unpaid claim liability for the most recent incurral months
($20.9 million, included in the table above as part of the
development in the most recent incurral months) and an update of
the completion factors used in the developmental method of
estimating the unpaid claim liability to reflect more current
claims administration practices ($12.3 million, included in
the table above as part of the development in the completion
factors). The favorable claims liability development experience
at the SEA Division in 2005 also reflected the effects of a
favorable adjustment in the amount of $7.6 million recorded
in the first quarter of 2005 attributable to a refinement of an
estimate for the Companys claim liability established with
respect to the ACE (accumulated covered expense) rider that
provides for catastrophic coverage on the SEA Divisions
scheduled health insurance products. Excluding the impact of the
refinements discussed above, the remaining favorable experience
in 2005 in the claims liability was $80.5 million, or 16.3%
of total claim liabilities established for the SEA Division at
December 31, 2004. Most of the remaining redundancy
($51.8 million in addition to the refinement described
above) is attributable to experience in the five most recent
incurral months developing more favorably than anticipated (as
discussed above) and unanticipated improvements on certain
closed blocks that appeared to have been deteriorating based on
experience available at the end of 2004. The Company experienced
an additional redundancy in the completion factors of
$8.8 million (in addition to the redundancy from the
refinement previously described in the third quarter of
2005) as the result of claims developing in amounts less
than anticipated by the completion factors used at
December 31, 2004. The Company also experienced favorable
development of $8.5 million in its reserve for large claims
as a result of lower frequency and severity of large claims than
anticipated. In addition, the Company experienced favorable
development of approximately $7.0 million associated with
its reserves for regulatory and legal matters due to settlements
of certain matters on terms more favorable than originally
anticipated.
The total favorable claims liability development experience for
2004 in the amount of $91.7 million represented 20.2% of
total claim liabilities established for the SEA Division at
December 31, 2003. The favorable claims liability
development experience at the SEA Division in 2004 reflected the
effect of $47.8 million in claim liabilities established
during 2003 in response to a rapid pay down during 2003 of an
excess pending claims inventory. In particular, during 2003 the
Company observed a change in the distribution of paid claims by
incurred date; more paid claims were assigned to recent incurred
dates than had been the case on paid claims in prior years.
Assignment of paid claims with more recent incurred dates
typically results in an understatement of the claim development
liability, resulting in the need for augmented claim
liabilities. The Company believes that the deviation from
historical experience in incurred date assignment was a natural
consequence of the effort required to reduce a claims backlog,
which the Company was experiencing at the SEA Division during
the course of 2003. However, as the actual claims experience
developed in 2004, these augmented claim liabilities in the
amount of $47.8 million proved to be redundant. These claim
liabilities were released during 2004 and, as a result, did not
influence the level of claim liabilities redundancies in 2005
and will not influence the level of claim liabilities
redundancies in future periods. Excluding the impact of the
augmented claim liabilities established at December 31,
2003 in response to the rapid pay down during 2003 of an excess
pending claims inventory, the favorable experience in 2004 in
the claims liability was $43.9 million, or 9.6% of total
claim liabilities established for the SEA Division at
December 31, 2003. Of the remaining redundancy,
$42.9 million was attributable to experience in the five
most recent incurral months developing more favorably than
anticipated as a result of unanticipated improvements in the
experience on products that had been showing indications of
deterioration in response to a reduction in the level of rate
increases. The Company experienced an additional favorable
development in the completion factors of $7.7 million as a
result of lower than expected claim payments. The Company also
experienced favorable development of $5.4 million in its
reserve for large claims as a result of lower frequency and
severity of large claims than anticipated. In addition, the
Company experienced unfavorable development of nearly
$18.9 million associated with its reserves for regulatory
and legal matters as the result of certain claim litigation and
the establishment of additional reserves in response to claim
payment issues raised in a market conduct examination.
F-37
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Over time, the developmental method replaces anticipated
experience with actual experience, resulting in an ongoing
re-estimation of the claims liability. Since the greatest degree
of estimation is used for more recent periods, the most recent
prior year is subject to the greatest change. Recent actual
experience has produced lower levels of claims payment
experience than originally expected.
In response to the redundancies exhibited above, the Company
elected in the third quarter of 2005 for the SEA Division to
modify the assumptions used in the most recent incurral months
to rely less on loss ratios assumed in the establishment of
premium rates and more on historical experience, reducing the
claim liability estimate in the most recent incurral months by
$20.9 million. In addition, in response to observed changes
in the pattern of claim payments, the Company elected in the
third quarter of 2005 to update the completion factors used in
the developmental method to estimate the claim liabilities at
the SEA Division in a manner designed to produce new completion
factors that were anticipated to be equally likely to be
redundant as deficient. As a result of the new completion
factors, the claims liability estimate was reduced by
$12.3 million. In total, these two adjustments in 2005
resulted in an aggregate reduction to the Companys claim
liability estimate in the amount of $33.3 million.
Impact on Life Insurance Division. The varied
claim liability development experience at the Life Insurance
Division for each of the years presented is due to the
development of a closed block of workers compensation
business. The Life Insurance Division previously wrote
workers compensation insurance and similar group accident
coverage for employers in a limited geographical market. In May
2001, the Company made the decision to terminate this operation,
and all existing policies were terminated as the policies came
up for renewal over the succeeding twelve months. The closing of
new and renewal business starting in July of 2001 had the effect
of concentrating the claims experience into existing policies
and eliminating any benefits that might accrue from improved
underwriting of new business or liabilities released on newer
claims that might settle more quickly. The effect of closing a
block of this type of business is difficult to estimate at the
date of closing, due to the longer claims tail usually
experienced with workers compensation coverage, the tendency of
claims to concentrate in severity but without an associated
degree of predictability as the number of cases decreases, and
the unpredictable costs of protracted litigation often
associated with the adjudication of claims under workers
compensation policies.
Impact on Other Insurance. Through our
82.5%-owned subsidiary, ZON Re USA LLC (ZON Re), we
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. The favorable claim liability experience of
$2.5 million in 2006 is due to the release of reserves held
at December 31, 2005 for catastrophic excess of loss
contracts expiring during 2006. The unfavorable claim liability
development experience at ZON Re in 2005 in the amount of
$805,000 was due to certain large claims reported in 2005
associated with claims incurred in the prior year.
Impact Disposed Operations. The products of
the Companys former Student Insurance and Star HRG
Divisions consist principally of medical insurance. In general,
medical insurance business, for which incurred dates are
assigned based on date of service, has a short tail,
which means that a favorable development or unfavorable
development shown for prior years relates primarily to actual
experience in the most recent prior year.
The favorable claim liability development experience at the
Student Insurance Division in 2006 and 2005 was $478,000 and
$5.2 million, respectively. This favorable development was
due to claims in the current year developing more favorably than
indicated by the loss trends used to determine the claim
liability at December 31 of the preceding year. The
unfavorable claims liability development experience in 2004 in
the amount of $4.7 million reflects the effects of a delay
in processing of prior-year claims and
higher-than-expected
claim experience associated with the business written for the
2003-2004
school year.
The favorable claims liability development experience at Star
HRG Division of $1.4 million in 2006 included the effects
of claims in 2006 developing more favorably than indicated by
the loss trends in 2005 used to determine the claim liability at
December 31, 2005. The unfavorable claim liability
development at the Star HRG Division in 2005 of $410,000 was
within the normal statistical variation in the model used to
develop the reserve. The actual
F-38
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
development of prior years claims exceeded the expected
development of the claims liability. The favorable claims
liability development experience of $3.0 million in 2004
includes the effects of claims in 2004 developing more favorably
than indicated by the loss trends in 2003 used to determine the
claim liability at December 31, 2003.
Note H
Reinsurance
The Companys insurance subsidiaries, in the ordinary
course of business, reinsure certain risks with other insurance
companies. These arrangements provide greater diversification of
risk and limit the maximum net loss potential to the Company
arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the
reinsurance agreements, the Company remains liable.
The reinsurance receivable included in the consolidated
financial statements at December 31, 2006 and 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Paid losses recoverable
|
|
$
|
13,995
|
|
|
$
|
2,097
|
|
Unpaid losses recoverable
|
|
|
72,582
|
|
|
|
12,105
|
|
Other net
|
|
|
68,706
|
|
|
|
9,800
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance receivable
|
|
$
|
155,283
|
|
|
$
|
24,002
|
|
|
|
|
|
|
|
|
|
|
The effects of reinsurance transactions reflected in the
consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,815,868
|
|
|
$
|
1,871,102
|
|
|
$
|
1,869,885
|
|
Assumed
|
|
|
37,740
|
|
|
|
40,310
|
|
|
|
25,277
|
|
Ceded
|
|
|
(99,029
|
)
|
|
|
(15,999
|
)
|
|
|
(12,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written
|
|
$
|
1,754,579
|
|
|
$
|
1,895,413
|
|
|
$
|
1,882,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,820,353
|
|
|
$
|
1,892,519
|
|
|
$
|
1,840,738
|
|
Assumed
|
|
|
37,740
|
|
|
|
39,072
|
|
|
|
31,364
|
|
Ceded
|
|
|
(120,847
|
)
|
|
|
(14,057
|
)
|
|
|
(13,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned
|
|
$
|
1,737,246
|
|
|
$
|
1,917,534
|
|
|
$
|
1,858,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded benefits and settlement
expenses
|
|
$
|
72,113
|
|
|
$
|
29,259
|
|
|
$
|
10,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
Coinsurance Arrangements
In connection with the separate 2006 sales of substantially all
of the assets formerly comprising the Companys Star HRG
unit and Student Insurance Division, insurance subsidiaries of
the Company entered into 100% coinsurance arrangements with each
of the purchasers, pursuant to which the purchasers agreed to
assume liability for future claims associated with the Star HRG
Division and Student Insurance Division blocks of group accident
and health insurance policies in force as of the respective
closing dates. See Note C for additional information
with respect to these coinsurance arrangements.
F-39
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note I
Debt
Set forth below is a summary of the Companys long-term
indebtedness outstanding at December 31, 2006 and 2005
(excluding outstanding indebtedness that is secured by student
loans generated by the College Fund Life
Division see Note J):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
118,570
|
|
|
$
|
15,470
|
|
Term loan
|
|
|
437,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
556,070
|
|
|
|
15,470
|
|
Less: current portion of long-term
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
556,070
|
|
|
|
15,470
|
|
|
|
|
|
|
|
|
|
|
Total short and long term debt
|
|
$
|
556,070
|
|
|
$
|
15,470
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth additional information with
respect to the Companys debt (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
Interest Rate at
|
|
|
Interest Expense
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
2006 credit
agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
437,500
|
|
|
|
6.37
|
%
|
|
$
|
22,035
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
$75 Million revolver (non-use
fee)
|
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UICI Capital Trust I
|
|
|
15,470
|
|
|
|
8.87
|
%
|
|
|
1,340
|
|
|
|
1,063
|
|
|
|
537
|
|
|
|
|
|
HealthMarkets Capital Trust I
|
|
|
51,550
|
|
|
|
8.41
|
%
|
|
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthMarkets Capital Trust II
|
|
|
51,550
|
|
|
|
8.37
|
%
|
|
|
3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.75% Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
Star Purchase Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
|
|
Line of Credit non
usage fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
Interest on Deferred Tax
|
|
|
|
|
|
|
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student loan credit
facility (see Note J)
|
|
|
118,950
|
|
|
|
5.34
|
%
|
|
|
6,318
|
|
|
|
4,861
|
|
|
|
2,334
|
|
|
|
|
|
Amortization of financing fees
|
|
|
|
|
|
|
|
|
|
|
3,734
|
|
|
|
85
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
675,020
|
|
|
|
|
|
|
$
|
41,141
|
|
|
$
|
6,009
|
|
|
$
|
3,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is the supplemental calculation of the
amortization of financing fees included in interest expense
associated with the Companys non-student loan debt
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount at
|
|
|
|
|
|
Amortization Expense
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2006
|
|
|
Life (years)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
2006 credit
agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loan(1)
|
|
$
|
18,316
|
|
|
|
6
|
|
|
$
|
5,083
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
$75 Million revolver (non-use
fee)
|
|
|
2,687
|
|
|
|
5
|
|
|
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UICI Capital Trust I
|
|
|
198
|
|
|
|
5
|
|
|
|
85
|
|
|
|
85
|
|
|
|
56
|
|
|
|
|
|
HealthMarkets Capital Trust I
|
|
|
2,624
|
|
|
|
5
|
|
|
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HealthMarkets Capital Trust II
|
|
|
2,626
|
|
|
|
5
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,451
|
|
|
|
|
|
|
$
|
6,371
|
|
|
$
|
85
|
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amortization of financing fees for the year ended
December 31, 2006 includes $2.5 million of
amortization included in interest expense on the Companys
statement of operations. An additional $2.6 million in the
year ended December 31, 2006 relates to the loss on early
extinguishment due to the prepayment of debt in the amount of
$60.0 million. This additional amount is included in
Gains (losses) on sale of investments in the
Companys Consolidated Statement of Operations. |
Principal payments required for the Companys debt for each
of the next five years and thereafter are as follows (in
thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
|
|
2008
|
|
|
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
2012 and thereafter
|
|
|
556,070
|
|
|
|
|
|
|
|
|
$
|
556,070
|
|
|
|
|
|
|
The fair value of the Companys long-term debt (exclusive
of indebtedness outstanding under the Companys secured
student loan funding facility) was $556.5 million and
$15.5 million at December 31, 2006 and 2005,
respectively. The fair value of such long-term debt is estimated
using discounted cash flow analyses, based on the Companys
current incremental borrowing rates for similar types of
borrowing arrangements.
Total interest paid with respect to outstanding indebtedness
under the Companys corporate debt was $23.9 million,
$1.0 million and $1.1 million in the years ended
December 31, 2006, 2005 and 2004, respectively.
2006
Credit Agreement
In connection with the Merger completed 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, and the
proceeds thereof were used to fund a portion of the
consideration paid in the Merger. At December 31, 2006, the
Company had an aggregate of $437.5 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 (1.00%). The
F-41
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company has not drawn on the $75.0 million revolving credit
facility. During the year ended December 31, 2006, the
Company made regularly scheduled quarterly principal payments in
the amount of $2.5 million and a voluntary prepayment in
the amount of $60.0 million on the term loan facility.
The revolving credit facility will mature on April 5, 2011,
and the term loan facility will mature on April 5, 2012.
The term loan required nominal quarterly installments (not
exceeding 0.25% of the aggregate principal amount at the date of
issuance) until the maturity date at which time the remaining
principal amount is due. As a result of the $60.0 million
prepayment, the Company is not obligated to make future nominal
quarterly installments as previously required by the credit
agreement. Borrowings under the credit agreement may be subject
to certain mandatory prepayments. At HealthMarkets, LLCs
election, the interest rates per annum applicable to borrowings
under the credit agreement will be based on a fluctuating rate
of interest measured by reference to either (a) LIBOR plus
a borrowing margin, or (b) a base rate plus a borrowing
margin. HealthMarkets, LLC will pay (a) fees on the unused
loan commitments of the lenders, (b) letter of credit
participation fees for all letters of credit issued, plus
fronting fees for the letter of credit issuing bank, and
(c) other customary fees in respect of the credit facility.
Borrowings and other obligations under the credit agreement are
secured by a pledge of HealthMarkets, LLCs interest in
substantially all of its subsidiaries, including the capital
stock of MEGA, Mid-West and Chesapeake.
In connection with the financing, the Company incurred issuance
costs of $26.5 million, which cost was capitalized
(included in Other assets on the Companys
consolidated balance sheet) and is being amortized over five
years as interest expense.
Trust Preferred
Securities
2006
Notes
On April 5, 2006, HealthMarkets Capital Trust I and
HealthMarkets Capital Trust II (two newly formed 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% through but excluding June 15, 2011 and
thereafter at a floating rate equal to three-month LIBOR plus
3.05%. Distributions on the Trust Securities will be paid
at the same interest rates paid on the Notes.
The Notes, which constitute the sole assets of the Trusts, are
subordinate and junior in right of payment to all senior
indebtedness (as defined in the Indentures) of HealthMarkets,
LLC. The Company has fully and unconditionally guaranteed the
payment by the Trusts of distributions and other amounts payable
under the Trust Securities. The guarantee is subordinated
to the same extent as the Notes.
The Trusts are obligated to redeem the Trust Securities
when the Notes are paid at maturity or upon any earlier
prepayment of the Notes. Prior to June 15, 2011, the Notes
may be redeemed only upon the occurrence of certain tax or
regulatory events at 105.0% of the principal amount thereof in
the first year reducing by 1.25% per year until it reaches
100.0%. On and after June 15, 2011 the Notes are
redeemable, in whole or in part, at the option of the Company at
100.0% of the principal amount thereof.
In accordance with FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, the accounts
of the Trusts have not been consolidated with those of the
Company and its consolidated subsidiaries. The Companys
$3.1 million investment in the common equity of the Trusts
has been reflected on the Companys consolidated balance
sheet as short term and other investments, and the
income paid to the Company by the Trusts with respect to the
common securities, and interest received by the Trust from the
Company with respect to the $100.0 million principal amount
of the Notes, has been reflected in the Companys
consolidated statement of operations as interest income and
interest expense, respectively. The amount of such interest
income and interest expense was $194,000
F-42
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and $6.5 million, respectively, for 2006 (April 5,
2006 through December 31, 2006). In connection with the
financing, the Company incurred issuance costs of
$6.0 million, which cost was capitalized (included in
Other assets on the Companys consolidated
balance sheet) and is being amortized over five years as
interest expense.
2004
Notes
On April 29, 2004, the Company through a newly formed
Delaware statutory business trust (the 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
Trust Preferred Securities). The Trust invested
the $15.0 million proceeds from the sale of the
Trust Preferred Securities, together with the proceeds from
the issuance to the Company by the Trust of its floating rate
common securities in the amount of $470,000 (the Common
Securities and, collectively with the Trust Preferred
Securities, the 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, which date
may be accelerated to a date not earlier than April 29,
2009. The Notes may be prepaid prior to April 29, 2009, at
107.5% of the principal amount thereof, upon the occurrence of
certain events, and thereafter at 100.0% of the principal amount
thereof. The 2004 Notes, which constitute the sole assets of the
Trust, are subordinate and junior in right of payment to all
senior indebtedness (as defined in the Indenture, dated
April 29, 2004, governing the terms of the 2004 Notes) of
the Company. The 2004 Notes accrue interest at a floating rate
equal to three-month LIBOR plus 3.50%, payable quarterly on
February 15, May 15, August 15, and November 15
of each year. At December 31, 2006, the 2004 Notes bore
interest at an annual rate of 8.87%. The quarterly distributions
on the Trust Securities are paid at the same interest rate
paid on the 2004 Notes.
The Company has fully and unconditionally guaranteed the payment
by the Trust of distributions and other amounts payable under
the Trust Preferred Securities. The Trust must redeem the
Trust Securities when the 2004 Notes are paid at maturity
or upon any earlier prepayment of the 2004 Notes. Under the
provisions of the 2004 Notes, the Company has the right to defer
payment of the interest on the 2004 Notes at any time, or from
time to time, for up to twenty consecutive quarterly periods. If
interest payments on the 2004 Notes are deferred, the
distributions on the Trust Securities will also be deferred.
On April 29, 2004, the Company received proceeds from the
transaction in the amount of $14.6 million, net of issuance
costs in the amount of $423,500. The issuance cost was
capitalized (included in other assets on the
Companys consolidated balance sheet) and is being
amortized over five years as interest expense.
Note J
Student Loan Credit Facility
At December 31, 2006 and 2005, the Company had an aggregate
of $119.0 million and $130.9 million, respectively, of
indebtedness outstanding under a secured student loan credit
facility, which indebtedness is represented by Student
Loan Asset-Backed Notes (the SPE Notes) issued
by a bankruptcy-remote special purpose entity (the
SPE). At December 31, 2006 and 2005,
indebtedness outstanding under the secured student loan credit
facility was secured by alternative (i.e., non-federally
guaranteed) student loans and accrued interest in the carrying
amount of $111.2 million and $115.3 million,
respectively, and by a pledge of cash, cash equivalents and
other qualified investments in the amount of $14.2 million
and $20.5 million, respectively.
All indebtedness issued under the secured student loan credit
facility is reflected as student loan indebtedness on the
Companys consolidated balance sheet; all such student
loans and accrued investment income pledged to secure such
facility are reflected as student loan assets and accrued
investment income, respectively, on the Companys
consolidated balance sheet; and all such cash, cash equivalents
and qualified investments specifically pledged under the student
loan credit facility are reflected as restricted cash on the
Companys consolidated balance sheet. 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. Accordingly, in connection with
the financing the Company has recorded and will in the future
record no gain on sale of the assets transferred to the SPE.
F-43
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The SPE Notes were issued by the SPE in three tranches
($50.0 million of
Series 2001A-1
Notes and $50.0 million of
Series 2001A-2
Notes issued on April 27, 2001, and $50.0 million of
Series 2002A Notes issued on April 10, 2002). The
interest rate on each series of SPE Notes resets monthly in a
Dutch auction process. At December 31, 2006, the
Series 2001A-1
Notes, the
Series 2001A-2
Notes and the Series 2002A Notes bore interest at the per
annum rate of 5.34 %.
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. However, the SPE Notes are subject to
mandatory redemption in whole or in part (a) on the first
interest payment date which is at least 45 days after
February 1, 2007, from any monies then remaining on deposit
in the acquisition fund not used to purchase additional student
loans and (b) on the first interest payment date which is
at least 45 days after July 1, 2005, from any monies
then remaining on deposit in the acquisition fund 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. Beginning July 1,
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
2006 and 2005, the Company made principal payments in the
aggregate of $11.9 million and $19.1 million,
respectively, on these SPE Notes.
The SPE and the secured student loan credit facility were
structured with an expectation that interest and recoveries of
principal to be received with respect to the underlying student
loans securing payment of the SPE Notes would be sufficient to
pay principal of and interest on the SPE Notes when due,
together with operating expenses of the SPE. This expectation
was based upon analysis of cash flow projections, and
assumptions regarding the timing of the financing of the
underlying student loans to be held by the SPE, the future
composition of and yield on the financed student loan portfolio,
the rate of return on monies to be invested by the SPE in
various funds and accounts established under the indenture
governing the SPE Notes, and the occurrence of future events and
conditions. There can be no assurance, however, that the student
loans will be financed as anticipated, that interest and
principal payments from the financed student loans will be
received as anticipated, that the reinvestment rates assumed on
the amounts in various funds and accounts will be realized, or
other payments will be received in the amounts and at the times
anticipated.
Principal payments required for the Companys corporate
debt and indebtedness outstanding under the Companys
secured student loan funding facility in each of the next five
years and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
Student Loan
|
|
|
|
Credit Facility
|
|
|
2007
|
|
$
|
18,050
|
|
2008
|
|
|
14,050
|
|
2009
|
|
|
14,500
|
|
2010
|
|
|
13,800
|
|
2011
|
|
|
12,500
|
|
2012 and thereafter
|
|
|
46,050
|
|
|
|
|
|
|
|
|
$
|
118,950
|
|
|
|
|
|
|
The carrying amount of the outstanding indebtedness that is
secured by student loans generated by the College Fund Life
Division approximates fair value, since interest rates on such
indebtedness reset monthly.
Total interest paid with respect to outstanding indebtedness
under the Companys secured student loan credit facility
was $6.3 million, $4.8 million and $2.3 million
for the years ended December 31, 2006, 2005 and 2004,
respectively.
F-44
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note K
Derivatives
The Company uses derivative instruments 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 derivative instruments are
carried at fair value on the balance sheet. The Company values
its derivative instruments using a third party. As of
December 31, 2006, the recorded fair values of derivative
assets were $257,000.
Certain derivative instruments are formally designated in
SFAS 133 hedge relationships as a hedge of one of the
following: the fair value of a recognized asset or liability,
the expected future cash flows of a recognized asset or
liability, or the expected future cash flows of a forecasted
transaction. The Company only utilizes cash flow derivatives
and, both at the inception of the hedge and on an ongoing basis,
the Company assesses the effectiveness of the hedge instrument
in achieving offsetting changes in cash flows compared to the
hedged item. To prospectively test effectiveness, management
performs a qualitative assessment of the critical terms of the
hedged item and hedging instrument. In certain cases, management
also performs a quantitative assessment by estimating the change
in the fair value of the derivative and hedged item under
various interest rate shock scenarios using either the dollar
offset ratio method or regression analysis. The method utilized
to assess retrospective hedge effectiveness is the dollar offset
ratio test and was applied on a quarterly basis.
As with any financial instrument, derivative instruments have
inherent risks, primarily market and credit risk. Market risk
associated with changes in interest rates is managed as part of
the Companys overall market risk monitoring process by
establishing and monitoring limits as to the degree of risk that
may be undertaken. Credit risk occurs when a counterparty to a
derivative contract in which the Company has an unrealized gain
fails to perform according to the terms of the agreement. The
Company minimizes its credit risk by entering into transactions
with counterparties that maintain high credit ratings.
Under the guidelines of SFAS 133 Accounting for
Derivative Instruments and Hedging Activities, as amended,
all derivative instruments are required to be carried on the
balance sheet at fair value on the balance sheet date. For a
derivative instrument designated as a cash flow hedge, the
effective portion of changes in the fair value of the derivative
instrument is recorded under the caption Change in
unrealized gains (losses) on cash flow hedging
relationship in the Companys Consolidated Statement
of Stockholders Equity and Comprehensive Income (Loss) and
is recognized in the statement of operations when the hedged
item affects results of operations. If it is determined that
(i) an interest rate swap is not highly effective in
offsetting changes in the cash flows of a hedged item,
(ii) the derivative expires or is sold, terminated or
exercised, or (iii) the derivative is undesignated as a
hedge instrument because it is unlikely that a forecasted
transaction will occur, the Company discontinues hedge
accounting prospectively.
If hedge accounting is discontinued, the derivative instrument
will continue to be carried at fair value, with changes in the
fair value of the derivative instrument recognized in the
current periods results of operations. When hedge
accounting is discontinued because it is probable that a
forecasted transaction will not occur, the accumulated gains and
losses included in accumulated other comprehensive income will
be recognized immediately in results of operations.
At the effective date of the Merger, an affiliate of The
Blackstone Group assigned to the Company three interest rate
swap agreements with an aggregate notional amount of
$300.0 million. The terms of the swaps are 3, 4 and
5 years beginning on April 11, 2006. At the effective
date of the Merger, the interest rate swaps had an aggregate
fair value of approximately $2.0 million, which is
reflected under the caption Additional paid-in
capital on the Companys Consolidated Balance Sheet.
The Company established the hedging relationship on
April 11, 2006 to hedge the risk of changes in the
Companys cash flow attributable to changes in the LIBOR
rate applicable to its variable-rate term loan. At the inception
of the hedging relationship, the interest rate swaps had an
aggregate fair value of approximately $2.6 million.
At December 31, 2006, the Company prepared its quarterly
assessment of hedge effectiveness and determined that all three
swaps were not highly effective for the period, as defined by
SFAS 133 Accounting for Derivative
F-45
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Instruments and Hedging Activities. The Company
terminated the hedging relationships as of October 1, 2006,
the beginning of the period of assessment. During the fourth
quarter the change in fair market value of the derivatives in
aggregate increased $370,000 ($241,000 net of tax), which
amount is reflected under the caption Investment
income on the Companys Consolidated Statement of
Operations.
The Company presents the fair value of the interest rate swap
agreements at the end of the period in either Other
assets or Other liabilities, as applicable, on
its consolidated balance sheet. The Company assessed on a
quarterly basis the ineffectiveness of the hedging relationship
and any gains or losses related to the ineffectiveness are
recorded in Investment income on its Consolidated
Statement of Operations. Prior to the termination of the hedging
relationship, the Company incurred a loss of $(316,000) related
to the ineffectiveness of the interest rate swap. At
December 31, 2006, accumulated other comprehensive income
included a deferred after-tax net loss of $(1.6) million related
to the interest rate swaps. During 2006, pretax income of
$659,000 ($428,000 net of tax) was reclassified into
interest expense as adjustments to interest payments on variable
rate debt. Upon termination of the hedging relationship in the
fourth quarter of 2006, $158,000 ($103,000 net of tax) was
reclassified into Investment income from accumulated other
comprehensive income and the remaining amount is expected to be
reclassified into earnings in conjunction with the interest
payments on the variable rate debt through April 2011.
Note L
Grapevine Finance LLC
On August 3, 2006, Grapevine Finance LLC
(Grapevine) was incorporated in the State of
Delaware as a wholly owned subsidiary of HealthMarkets, LLC. On
August 16, 2006, MEGA distributed and assigned to
HealthMarkets, LLC as a dividend in kind the $150.8 million
promissory note (CIGNA Note) and related Guaranty
Agreement issued by Connecticut General Corporation in the Star
HRG sale transaction (see Note C). The CIGNA Note
and Guaranty Agreement were assigned at cost, which approximated
fair value. As a result, the Company did not recognize a related
gain or loss on the assignment. After receiving the assigned
CIGNA Note and Guaranty Agreement from MEGA, HealthMarkets, LLC
in turn assigned the CIGNA Note and Guaranty Agreement to
Grapevine.
On August 16, 2006, Grapevine issued $72.4 million of
its senior secured notes to an institutional purchaser (the
Grapevine Notes). The net proceeds from the
Grapevine Notes in the amount 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 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
(Trustee) for the benefit of the holder of the
Grapevine Notes. Pursuant to an Indenture and direction notices
from Grapevine, the 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.
Grapevine is a non-consolidated qualifying special purpose
entity as defined in FASB 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities. As a qualifying special purpose entity,
HealthMarkets does not consolidate the financial results of
Grapevine and accounts for its residual interest in Grapevine as
an investment in fixed maturity securities pursuant to
EITF 99-20,
Recognition of Interest Income and Impairment on Purchase and
Retained Beneficial Interests in Securitized Financial Assets.
On November 1, 2006, the Companys investment in
Grapevine was reduced by the receipt of cash from Grapevine in
the amount of $72.4 million. At December 31, 2006, the
Companys investment in Grapevine, at fair value, was
$4.8 million.
The Company measures the fair value of its residual interest in
Grapevine using a present value model incorporating the
following two key economic assumptions: (1) the timing of
the collections of interest on the CIGNA Note, payments of
interest expense on the senior secured notes and payment of
other administrative expenses and (2) an assumed discount
rate equal to the 15 year swap rate. Variations in the fair
value could occur due
F-46
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to changes in the prevailing interest rates and changes in the
counterparty credit rating of debtor. Using a sensitivity
analysis model assuming a 100 basis point increase and a
150 basis point increase in interest rates at
December 31, 2006, the fair market value on the
Companys investment in Grapevine would have decreased
approximately $464,000 and $674,000, respectively.
Note M
Federal Income Taxes
Deferred income taxes for 2006 and 2005 reflect the impact of
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. Deferred tax
liabilities and assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition and
loan origination
|
|
$
|
61,147
|
|
|
$
|
39,477
|
|
Depreciable and amortizable assets
|
|
|
13,597
|
|
|
|
10,494
|
|
Gain on installment sales of assets
|
|
|
54,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax
liabilities
|
|
|
129,139
|
|
|
|
49,971
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Litigation accruals
|
|
|
2,782
|
|
|
|
6,806
|
|
Policy liabilities
|
|
|
23,009
|
|
|
|
30,455
|
|
Operating loss carryforwards
|
|
|
136
|
|
|
|
366
|
|
Capital losses
|
|
|
|
|
|
|
16,710
|
|
Unrealized losses on securities
|
|
|
6,759
|
|
|
|
4,213
|
|
Invested assets
|
|
|
1,522
|
|
|
|
3,418
|
|
Stock compensation accrual
|
|
|
16,751
|
|
|
|
12,895
|
|
Other
|
|
|
4,605
|
|
|
|
5,392
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
55,564
|
|
|
|
80,255
|
|
Less: valuation allowance
|
|
|
|
|
|
|
18,182
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
55,564
|
|
|
|
62,073
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(73,575
|
)
|
|
$
|
12,102
|
|
|
|
|
|
|
|
|
|
|
The Company establishes a valuation allowance when management
believes, based on the weight of the available evidence, that it
is more likely than not that some portion of the deferred tax
asset will not be realized. Realization of the net deferred tax
asset is dependent on generating sufficient future taxable
income and ongoing prudent and feasible tax planning strategies
to generate sufficient future taxable income.
Beginning in 2003, the Company realized net capital losses that
were carried forward and available to offset future capital
gains, if any, realized in the following 5 years. The
Company determined, in 2003, that it likely would not generate
sufficient capital gains to realize the deferred tax benefits of
the capital loss carryforwards and certain investment impairment
losses. At that time management did not anticipate selling
appreciated assets to generate capital gains (and impair future
investment return) solely for the purpose of utilizing the
capital loss carryover. Accordingly, the Company did not
recognize the tax benefits of these 2003 losses but, rather,
established a valuation allowance during 2003. The sales of the
Student Insurance and the Star HRG divisions during 2006,
however, generated capital gains in excess of the capital loss
carryover and the investment impairment losses. Accordingly,
F-47
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
during 2006 the Company released the valuation allowance of
$18.1 million established in 2003, thereby realizing the
deferred tax benefits of the capital loss carryforwards
generated in 2003.
For tax purposes, the Company realized capital gains from the
sales of the Student Insurance Division and Star HRG Division in
the aggregate amount of $221.9 million, of which
$155.4 million will be recognized as and when the Company
receives payment on the CIGNA Note received in consideration for
the sale of the Star HRG assets
and/or on
the UHG Note received in consideration for the sale of the
Student Insurance Division assets (see Notes C and
L). At December 31, 2006, the Company had recorded a
deferred tax liability in the amount of $73.6 million,
compared to a deferred tax asset in the amount of
$12.1 million at December 31, 2005. The increase in
the aggregate deferred tax liability was primarily attributable
to the deferred tax liability of $54.4 million associated
with the deferred capital gains realized in the sales of Star
HRG Division and Student Insurance Division. The increase in the
aggregate deferred tax liability also reflects the
$27.1 million tax effect of the cumulative adjustment for
policy acquisition costs of $77.6 million (see
Note A).
The provision for income tax expense (benefit) consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
From operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
57,506
|
|
|
$
|
92,372
|
|
|
$
|
69,987
|
|
Deferred tax expense
|
|
|
78,224
|
|
|
|
17,808
|
|
|
|
5,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from continuing operations
|
|
|
135,730
|
|
|
|
110,180
|
|
|
|
75,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
|
(2,325
|
)
|
|
|
899
|
|
|
|
4,350
|
|
Deferred tax expense (benefit)
|
|
|
(17,170
|
)
|
|
|
1,715
|
|
|
|
(5,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from discontinued operations
|
|
|
(19,495
|
)
|
|
|
2,614
|
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
116,235
|
|
|
$
|
112,794
|
|
|
$
|
74,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective income tax rates applicable to
continuing operations varied from the maximum statutory federal
income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Small life insurance company
deduction
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
Low income housing credit
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
Tax basis adjustment of assets sold
|
|
|
3.7
|
|
|
|
|
|
|
|
|
|
Nondeductible expenses
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.5
|
|
Merger transaction costs
|
|
|
1.8
|
|
|
|
1.0
|
|
|
|
|
|
Tax exempt income
|
|
|
(0.6
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
Reduction of tax accrual
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
(0.7
|
)
|
Other items, net
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
applicable to continuing operations
|
|
|
38.5
|
%
|
|
|
35.2
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under
pre-1984
federal income tax laws, a portion of a life insurance
companys gain from operations was not subject
to current income taxation but was accumulated for tax purposes
in a memorandum account designated as policyholders
surplus account (PSA). However, these accumulated amounts
are generally taxable if (a) the life insurance company
fails to qualify as a life insurance company for federal income
tax purposes for two consecutive years, (b) these amounts
are distributed or (c) these amounts exceed certain
statutory limitations. One of the Companys insurance
subsidiaries had an accumulation in a PSA account of
approximately $1.6 million at December 31, 2005. The
American Jobs Creation Act of 2004 (the 2004 Act)
suspended the taxation of distributions paid during 2005 and
2006 from the PSA account and changed the order of accounts
affected by distributions. Distributions during the suspension
period are deemed to reduce the PSA account before reducing the
amounts distributed from shareholder accounts. The insurance
subsidiary made a distribution to the Company during 2006 of
$1.7 million that is deemed a tax-free distribution of the
PSA account as provided by the 2004 Act.
At December 31, 2006, MEGA had a federal tax loss
carryforward from certain acquired subsidiaries of $388,000
available to offset taxable income in 2007 and expiring in 2007.
Total federal income taxes paid were $64.6 million,
$107.2 million and $87.6 million for 2006, 2005 and
2004, respectively.
The Company and all of its corporate subsidiaries (other than
two offshore life insurance companies that have not met the
ownership requirements to join a tax consolidation) file a
consolidated federal income tax return.
Note N
Stockholders Equity
On April 5, 2006, the Company completed its Merger with
affiliates of a group of private equity investors, including
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners. In the Merger,
holders of record of HealthMarkets common shares (other than
shares held by certain members of management and shares held
through HealthMarkets agent stock accumulation plans)
received $37.00 in cash per share. In the transaction,
HealthMarkets former public shareholders received
aggregate cash consideration of approximately $1.6 billion,
of which approximately $985.0 million was contributed as
equity by the private equity investors. The balance of the
merger consideration was financed with the proceeds of a
$500.0 million term loan facility extended by a group of
banks, the proceeds of $100.0 million of trust preferred
securities issued in a private placement, and Company cash on
hand in the amount of approximately $42.8 million.
At the effective date of the Merger, 58,746 of shares of
HealthMarkets common stock held by members of the Companys
senior management were converted into an equivalent number of
Class A-1
common shares of HealthMarkets, Inc., and 3,003,846 shares
of HealthMarkets common stock held by the Companys agents
were exchanged for an equivalent number of shares of
HealthMarkets, Inc.
Class A-2
common stock. In addition, in connection with the Merger,
110,612 shares of
Class A-1
common stock were issued to certain members of management. The
Company issued 26,621,622 of
Class A-1
common shares of HealthMarkets, Inc. to the designated
affiliates of the group of private equity investors as
consideration for the private equity investors
$985.0 million contribution to equity.
Shares of the Companys
Class A-2
common stock may be held solely by the Companys agents in
accordance with the terms of the Companys agent stock
accumulation plans. The rights and terms of the
Class A-2
common stock are otherwise similar to the rights and terms of
the
Class A-1
common stock except for certain transfer restrictions. All
holders of the Companys
Class A-1
common stock are parties to a Stockholders Agreement, governing
certain rights and obligations of such holders.
The Company accounted for the Merger as a leveraged
recapitalization, whereby the historical book value of the
assets and liabilities of the Company was maintained.
F-49
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth below the roll forward of
stockholders equity from March 31, 2006 to
December 31, 2006:
|
|
|
|
|
|
|
Stockholders
|
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Historical stockholders
equity at March 31, 2006
|
|
$
|
917,600
|
|
Equity contributions from private
equity investors
|
|
|
985,000
|
|
Purchase of common stock held by
former public shareholders
|
|
|
(1,611,988
|
)
|
Net income for the nine months
ended December 31, 2006
|
|
|
194,617
|
|
Change in accumulated other
comprehensive income
|
|
|
9,629
|
|
Equity costs related to the Merger
|
|
|
(31,650
|
)
|
Adjustment due to change in
accounting policy(1)
|
|
|
50,462
|
|
Other items
|
|
|
10,715
|
|
|
|
|
|
|
Stockholders equity at
December 31, 2006
|
|
$
|
524,385
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note A and the discussion under the caption
2006 Change in Accounting Policy. |
In connection with the repurchase in the Merger of HealthMarkets
common stock held by the public, the Companys Additional
Paid in Capital account was reduced to a deficit of
$(425.8) million, which amount was subsequently
reclassified to the Companys Retained Earnings account.
On August 18, 2004, the Companys Board of Directors
adopted a policy of issuing a regular semi-annual cash dividend
on shares of its common stock. In accordance with the dividend
policy, on August 18, 2004, the Companys Board of
Directors declared a regular semi-annual cash dividend of $0.25
on each share of Common Stock, which dividend was paid on
September 15, 2004 to shareholders of record at the close
of business on September 1, 2004. On February 9, 2005,
the Companys Board of Directors declared a regular
semi-annual cash dividend of $0.25 per share and a special
cash dividend of $0.25 per share. The regular and special
dividend were paid on March 15, 2005 to shareholders of
record at the close of business on February 21, 2005. On
July 28, 2005, the Companys Board of Directors
declared a regular semi-annual cash dividend of $0.25 on each
share of Common Stock, which was paid on September 15, 2005
to shareholders of record at the close of business on
August 22, 2005.
In accordance with the terms of the definitive agreement
contemplating the acquisition of the Company by the group of
private equity investors, the Company was prohibited from
declaring or paying additional dividends on shares of its common
stock until the completion of the Merger. Accordingly, in
September 2005, the Companys Board of Directors terminated
its previously announced policy of issuing a regular semi-annual
cash dividend on shares of its common stock.
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with the Company. The Agent Plans
generally combine an agent-contribution feature and a
Company-match feature. For financial reporting purposes, the
Company accounts for the Company-match feature of its Agent
Plans 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
participants. The Company estimates its current liability for
unvested matching credits by reference to the number of unvested
credits, the prevailing fair value (as determined by the
Companys Board of Directors since the Merger) of the
Companys common stock, and the Companys estimate of
the percentage of the vesting period that has elapsed up to the
current quarter end. Changes in the liability from one quarter
to the next are accounted for as an increase in, or decrease to,
compensation expense, as the case may be. Upon vesting, the
Company reduces the accrued liability (equal to the fair value
of the vested shares at date of vesting) with a corresponding
increase to equity. See Note Q.
F-50
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Generally, the total stockholders equity of domestic
insurance subsidiaries (as determined in accordance with
statutory accounting practices) in excess of minimum statutory
capital requirements is available for transfer to the parent
company, subject to the tax effects of distribution from the
policyholders surplus account described in
Note M. The minimum aggregate statutory capital and surplus
requirements of the Companys principal domestic insurance
subsidiaries was $74.5 million at December 31, 2006,
of which minimum surplus requirements for MEGA, Mid-West and
Chesapeake were $48.4 million, $18.1 million and
$8.0 million, respectively.
Prior approval by insurance regulatory authorities is required
for the payment by a domestic insurance company of dividends
that exceed certain limitations based on statutory surplus and
net income. During 2006 and 2005, the domestic insurance
companies paid dividends in the amount of $364.0 million
and $146.0 million, respectively, to the holding company.
During 2007, the Companys domestic insurance companies are
eligible to pay aggregate dividends to the parent company of
approximately $71.2 million without prior approval by
statutory authorities.
Following approval from the Oklahoma Insurance Department to pay
a special non-cash dividend in the amount of
$151.2 million, on August 16, 2006, MEGA distributed
and assigned the entire $150.8 million CIGNA Note and the
related Guaranty Agreement to HealthMarkets, LLC as a special
dividend in kind. See Note L of Notes to
Consolidated Financial Statements.
On December 29, 2006, the Oklahoma Department of Insurance
approved an extraordinary cash dividend in the amount of
$100 million payable from MEGA to HealthMarkets, LLC. MEGA
paid such dividend to HealthMarkets, LLC on January 18,
2007.
Combined net income and stockholders equity for the
Companys domestic insurance subsidiaries determined in
accordance with statutory accounting practices and as reported
in regulatory filings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
353,462
|
|
|
$
|
200,222
|
|
|
$
|
142,292
|
|
Statutory surplus
|
|
$
|
504,504
|
|
|
$
|
521,224
|
|
|
$
|
448,468
|
|
Note O
Related Party Transactions
Introduction
On April 5, 2006, the Company completed a merger (the
Merger) providing for the acquisition of the Company
by affiliates of a group of private equity investors, including
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners (the Private
Equity Investors). See Note B of Notes to
Consolidated Financial Statements. Immediately prior to the
Merger, Gladys J. Jensen, individually and in her capacity as
executor of the estate of the late Ronald L. Jensen (the
Companys founder and former Chairman), beneficially held
approximately 17.04% of the outstanding shares of the Company,
and the adult children of Mrs. Jensen beneficially held in
the aggregate approximately 10.09% of the outstanding shares of
the Company. As a result of the Merger, Mrs. Jensen and her
adult children divested their holdings in the Company, and
affiliates of The Blackstone Group, Goldman Sachs Capital
Partners and DLJ Merchant Banking Partners acquired, as of the
effective date of the Merger, approximately 55.3%, 22.7% and
11.3%, respectively, of the Companys outstanding equity
securities. At December 31, 2006, affiliates of The
Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners held approximately 55.1%, 22.6% and
11.3%, respectively, of the Companys outstanding equity
securities.
Certain members of the Board of Directors of the Company are
affiliated with the Private Equity Investors. In particular,
Chinh E. Chu and Matthew Kabaker serve as a Senior Managing
Director and a Principal, respectively, of The Blackstone Group,
Adrian M. Jones and Nathaniel Zilkha serve as a Managing
Director and a Vice President, respectively, of Goldman,
Sachs & Co., and Kamil M. Salame is a partner of DLJ
Merchant Banking Partners.
F-51
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a summary description of all material
transactions between the Company and the Private Equity
Investors and all other parties related to the Company. The
Company believes that the terms of all such transactions with
all related parties are and have been on terms no less favorable
to the Company than could have been obtained in arms
length transactions with unrelated third parties.
Transactions
with the Private Equity Investors
Transaction
and Monitoring Fee Agreements
At the closing of the Merger, the Company entered into separate
Transaction and Monitoring Fee Agreements with advisory
affiliates of each of the Private Equity Investors. In
accordance with the terms of the Transaction and Monitoring Fee
Agreements, at the closing of the Merger the Company paid a
one-time transaction fee in the amount of $18.9 million,
$6.0 million and $3.0 million to advisory affiliates
of The Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners, respectively. The Company also
reimbursed affiliates of The Blackstone Group for loan
commitment and other fees in the amount of $13.0 million
previously incurred by such affiliates of The Blackstone Group
in connection with the Merger.
The advisory affiliates of each of the Private Equity Investors
also agreed to provide to the Company ongoing monitoring,
advisory and consulting services, for which the Company agreed
to pay to affiliates of each of The Blackstone Group, Goldman
Sachs Capital Partners and DLJ Merchant Banking Partners an
annual monitoring fee in an amount equal to $7.7 million,
$3.2 million and $1.6 million, respectively. The
annual monitoring fees are in each case subject to 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.
The aggregate annual monitoring fees in the amount of
$12.5 million payable with respect to 2006 were paid in
full to the advisory affiliates of the Private Equity Investors
on April 5, 2006 (the closing date of the Merger). In
addition, in accordance with the Transaction and Monitoring Fee
Agreements, on April 5, 2006 (the closing date of the
Merger), the Company paid to the affiliates of each of The
Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners monitoring fees in the aggregate
amount of approximately $3.7 million related to services
rendered by such parties during the period commencing on
September 15, 2005 (the date of execution of the Agreement
and Plan of Merger) and ended on December 31, 2005.
In accordance with the terms of the Transaction and Monitoring
Fee Agreements, the Company also agreed to reimburse the
advisory affiliates of the Private Equity Investors for
out-of-pocket
expenses incurred in connection with the monitoring services and
to indemnify the advisory affiliates for certain claims and
expenses incurred in connection with the engagement.
Interest
Rate Swaps
At the effective date of Merger, an affiliate of The Blackstone
Group assigned to the Company three interest rate swap
agreements with an aggregate notional amount of
$300.0 million. At the effective date of the Merger, the
interest rate swaps had an aggregate fair value of approximately
$2.0 million.
Transaction
Fee Agreements
In accordance with the terms of separate Future Transaction Fee
Agreements, each dated as of May 11, 2006, affiliates of
each of the Private Equity Investors agreed to provide to the
Company certain financial and strategic advisory services with
respect to future acquisitions, divestitures and
recapitalizations. For such services, affiliates of The
Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners are entitled to receive 0.6193%,
0.2538% and 0.1269%, respectively, of the aggregate enterprise
value of any units acquired, sold or recapitalized by the
Company.
F-52
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the sale completed on July 11, 2006 of
substantially all of the assets comprising the Companys
Star HRG operations (see Note C), the Company remitted to
The Blackstone Group, Goldman Sachs Capital Partners and DLJ
Merchant Banking Partners the amount of $941,000, $386,000 and
$193,000, respectively, pursuant to the terms of the Future
Transaction Fee Agreements. In connection with the sale
completed on December 1, 2006 of substantially all of the
assets comprising the Companys Student Insurance Division
(see Note C), on December 14, 2006 the Company
remitted to affiliates of each of The Blackstone Group, Goldman
Sachs Capital Partners and DLJ Merchant Banking Partners the
amount of $619,000, $254,000 and $127,000, respectively,
pursuant to the terms of the Future Transaction Fee Agreements.
In accordance with the terms of the Future Transaction Fee
Agreements, the Company also agreed to reimburse the advisory
affiliates of the Private Equity Investors for
out-of-pocket
expenses incurred in connection with the advisory services and
to indemnify the advisory affiliates for certain claims and
expenses incurred in connection with the engagement.
Group
Purchasing Organization
Effective June 1, 2006, the Company agreed to participate
in a group purchasing organization (GPO)
that acts as the Companys agent to negotiate with third
party vendors the terms upon which the Company will obtain goods
and services in various designated categories that are used in
the ordinary course of the Companys business. On behalf of
the various participants in its group purchasing program, the
GPO extracts from such vendors pricing terms for such goods and
service that are believed to be more favorable than participants
could obtain for themselves on an individual basis. In
consideration for such favorable pricing terms, each participant
has agreed to obtain from such vendors not less than a specified
percentage of the participants requirements for such goods
and services in the designated categories. In connection with
purchases by participants, the GPO receives a commission from
the vendor in respect of such purchases. In consideration of The
Blackstone Groups facilitating the Companys
participation in the GPO and in monitoring the services that the
GPO provides to the Company, the GPO has agreed to remit to an
affiliate of The Blackstone Group a portion of the commission
received from vendors in respect of purchases by the Company
under the GPO purchasing program. The Companys
participation during 2006 was nominal with respect to purchases
by the Company under the GPO purchasing program in accordance
with the terms of this arrangement.
MEGA
Advisory Agreement- Student and Star HRG
Pursuant to the terms of an advisory agreement, dated
August 18, 2006, The Blackstone Group agreed to provide
certain financial and mergers and acquisition advisory services
to MEGA in connection with the sale by MEGA of MEGAs Star
HRG and Student Insurance operations. The terms of the advisory
agreement were approved by the Oklahoma Insurance Department
effective September 21, 2006. In accordance with the terms
of the advisory agreement, MEGA paid to an advisory affiliate of
The Blackstone Group a one-time investment banking fee in the
amount of $1.5 million in connection with the sale
completed on July 11, 2006 of substantially all of the
assets comprising MEGAs Star HRG operations and a one-time
investment banking fee in the amount of $1.0 million in
connection with the sale completed on December 1, 2006 of
substantially all of the assets comprising MEGAs Student
Insurance Division. The Company also agreed to reimburse The
Blackstone Group for
out-of-pocket
expenses incurred in connection with the advisory services and
to indemnify The Blackstone Group and its affiliates for certain
claims and expenses incurred in connection with the engagement.
The Company reimbursed The Blackstone Group and its affiliates
$94,000 for expenses incurred with the advisory services.
Pursuant to the terms of an amendment, dated December 29,
2006, to the advisory agreement, The Blackstone Group provided
certain tax structuring advisory services to MEGA in connection
with the sale by MEGA of MEGAs Student Insurance
operations, for which MEGA paid to an advisory affiliate of The
Blackstone Group in 2007, a tax structuring fee in the amount of
$1.0 million. The terms of the amendment were approved by
the Oklahoma Insurance Department effective February 8,
2007.
F-53
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Placement
Agreement
The Company entered into a placement agreement, dated
August 18, 2006, with The Blackstone Group, pursuant to
which the Company paid to an advisory affiliate of The
Blackstone Group a fee in the amount of $1.5 million for
securities placement and structuring services in connection with
a private placement of securities by Grapevine Finance LLC
completed on August 16, 2006. See Note L of Notes to
Consolidated Financial Statements. The Company has also agreed
to reimburse The Blackstone Group for
out-of-pocket
expenses incurred in connection with the placement services and
agreed to indemnify The Blackstone Group and its affiliates for
certain claims and expenses incurred in connection with the
engagement.
Registration
Rights Agreement
The Company is a party to a registration rights and coordination
committee agreement, dated as of April 5, 2006 (the
Registration Rights Agreement), with the investment
affiliates of each of the Private Equity Investors, providing
for demand and piggyback registration rights with respect to the
class A-1
common stock. Certain management stockholders are also expected
to become parties to the Registration Rights Agreement.
Following an initial public offering of the Companys
stock, the Private Equity Investors affiliated with The
Blackstone Group will have the right to demand such registration
under the Securities Act of its shares for public sale on up to
five occasions, the Private Equity Investors affiliated with
Goldman Sachs Capital Partners will have the right to demand
such registration on up to two occasions, and the Private Equity
Investors affiliated DLJ Merchant Banking Partners will have the
right to demand such registration on one occasion. No more than
one such demand is permitted within any
180-day
period without the consent of the board of directors of the
Company.
In addition, the Private Equity Investors have, and, if they
become parties to the Registration Rights Agreement, the
management stockholders will have, so-called
piggy-back rights, which are rights to request that
their shares be included in registrations initiated by the
Company or by any Private Equity Investors. Following an initial
public offering of the Companys stock, sales or other
transfers of the Companys stock by parties to the
Registration Rights Agreement will be subject to pre-approval,
with certain limited exceptions, by a Coordination Committee
that will consist of representatives from each of the Private
Equity Investor groups. In addition, the Coordination Committee
shall have the right to request that the Company effect a
shelf registration.
Transactions
with Mrs. Jensen and Affiliates of
Mrs. Jensen
Special
Investment Risks, Ltd.
Special Investment Risks, Ltd. (SIR) (formerly
United Group Association, Inc. (UGA)) is owned by
the estate of Ronald L. Jensen (the Companys founder and
former Chairman), of which Gladys J. Jensen
(Mr. Jensens surviving spouse) serves as independent
executor. Immediately prior to the Merger, Mrs. Jensen,
individually and in her capacity as executor of the estate of
Mr. Jensen, beneficially held approximately 17.04% of the
outstanding shares of the Company.
From the Companys inception through 1996, SIR sold health
insurance policies that were issued by AEGON USA and coinsured
by the Company or policies issued directly by the Company.
Effective January 1, 1997, the Company acquired the agency
force of SIR. In accordance with the terms of the asset sale to
the Company, SIR retained the right to receive all commissions
on policies written prior to January 1, 1997, including the
policies previously issued by AEGON and coinsured by the Company
and the policies previously issued directly by the Company. The
commissions paid to SIR on the coinsured policies issued by
AEGON are based on commission rates negotiated and agreed to by
AEGON and SIR at the time the policies were issued prior to
1997, and the commission rates paid on policies issued directly
by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share
of commissions payable to SIR on co-insured policies issued by
AEGON. During 2006 (covering the period from January 1,
2006 through April 5, 2006) , 2005 and 2004, SIR received
insurance commissions of $29,000, $134,000 and $176,000,
respectively, on the policies issued by
F-54
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
AEGON prior to January 1, 1997 and coinsured by the
Company. During 2006 (covering the period from January 1,
2006 through April 5, 2006), 2005 and 2004, SIR received
commissions of $543,000, $2.5 million and
$3.1 million, respectively, on policies issued prior to
January 1, 1997 and issued directly by the Company.
In accordance with the terms of an amendment, dated
July 22, 1998, to the terms of the sale of the UGA assets
to the Company, SIR was granted the right to retain 10% of net
renewal commissions (computed at the UGA Association
Field Services agency level) on any new business written by the
UGA agency force after January 1, 1997. In an effort to
simplify the calculation of the payments to be made to
Mr. Jensen and to clarify with specificity the business
subject to this override arrangement, effective October 1,
2003 the Company and SIR entered into an amendment to the asset
sale agreement, the principal effect of which is to change the
basis of the override calculation from a multiple of renewal
commissions received by UGA Association Field
Services to a multiple of commissionable renewal premium
received. Based on managements projections of future
business, the Company estimated that the absolute amount of
future override commission to be paid to SIR pursuant to the
amendment would not vary in any material respect from that
expected to be paid in accordance with the prior arrangement.
During the years ended December 31, 2006 (covering the
period from January 1, 2006 through April 5, 2006),
2005 and 2004, the Company paid to SIR the amount of
$1.2 million, $4.4 million and $3.9 million,
respectively, pursuant to this arrangement.
On May 19, 2006, the Company and SIR entered into a
Termination Agreement, pursuant to which SIR received an
aggregate of $47.5 million. All payments owing to SIR under
the asset sale agreement for policies written after
January 1, 1997 were discharged in full, SIR released the
Company and certain of its subsidiaries from all liability under
the asset sale agreement, and the asset sale agreement was
terminated. In addition, the Company and SIR agreed,
respectively, to indemnify the other party for all losses,
damages and other liabilities incurred in connection with the
breach of any covenant, agreement, representation or warranty
made by the respective party under the terms of the Termination
Agreement. See Note C.
In 2006 (covering the period from January 1, 2006 through
April 5, 2006) , 2005 and 2004, SIR paid to the Company
$39,000, $91,000 and $66,000, respectively, to fund obligations
of SIR owing to the Companys agent stock accumulation
plans. SIR incurred this obligation prior to the Companys
purchase of the UGA agency in 1997.
Richland
State Bank
Richland State Bank (RSB) is a state-chartered bank
in which Mrs. Jensen, as executor of the estate of
Mr. Jensen, holds a 100% equity interest. RSB provides
student loan origination services for the former College
Fund Life Insurance Division of MEGA and Mid-West.
Pursuant to a Loan Origination and Purchase Agreement, dated
June 12, 1999 and as amended, RSB originated student loans
and resold such loans to UICI Funding Corp. 2
(Funding) (a wholly owned subsidiary of the Company)
at par (plus accrued interest). During 2006 (covering the period
from January 1, 2006 through April 5, 2006), 2005 and
2004, RSB originated for the College Fund Life Division
$1.6 million, $7.6 million, $11.6 million,
respectively, aggregate principal amount plus accrued interest,
respectively, of student loans.
On July 28, 2005, the Companys Board of Directors
approved the execution and delivery of a new Loan Origination
and Purchase Agreement among the Company, UICI Funding
Corp. 2, RSB and Richland Loan Processing Center, Inc. (a
wholly owned subsidiary of RSB), pursuant to which RSB
originates and funds, and Richland Loan Processing Center, Inc.
provides underwriting, application review, approval and
disbursement services, in connection with private student loans
generated under the Companys College Fund Life
Division Program. For such services, RSB earns a fee in the
amount of 150 basis points (1.5%) of the original principal
amount of each disbursed student loan. The agreement further
provides that UICI Funding Corp. 2 will continue to purchase (at
par) the private loans funded and originated by Richland State
Bank. During 2006 (covering the period from January 1, 2006
through April 5, 2006) and 2005, RSB generated
origination fees in the amount of $26,000 and $78,000,
respectively, pursuant to the terms of this agreement.
F-55
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006 (covering the period from January 1, 2006
through April 5, 2006), 2005 and 2004, RSB collected on
behalf of, and paid to, UICI Funding Corp. 2 $150,000, $696,000
and $1.1 million, respectively, in guarantee fees paid by
student borrowers in connection with the origination of student
loans. During 2006, 2005 and 2004, RSB collected on behalf of
and collectively paid to the College Fund Life Division $0,
$59,000 and $289,000, respectively, representing origination
fees paid by student borrowers in connection with the
origination of student loans.
During 2006 (covering the period from January 1, 2006
through April 5, 2006), 2005 and 2004, UICI Funding Corp. 2
received from RSB interest income in the amount of $29,000,
$16,000 and $2,000, respectively, generated on money market
accounts maintained by the Company at, and on certificates of
deposit issued by, RSB.
Specialized
Association Services, Inc.
Specialized Association Services, Inc. (SAS) (which
is controlled by the adult children of Mrs. Jensen)
provides administrative and other services to the membership
associations that make available to their members the
Companys health insurance products.
Effective December 31, 2002, SAS and Benefit Administration
for the Self-Employed, LLC (BASE 105) (an 80% owned
subsidiary of the Company) entered into an agreement effective
January 1, 2003 (the January 2003 Agreement),
pursuant to which SAS purchased from BASE 105 a benefit provided
to association members. In 2006 (covering the period from
January 1, 2006 through April 5, 2006), 2005 and 2004
SAS paid BASE 105 the amount of $174,000, $2.0 million and
$3.1 million, respectively, in accordance with this
arrangement. Effective January 1, 2006, the January 2003
Agreement was terminated, and BASE 105 commenced providing the
benefit directly to the membership associations. The payment
received by BASE 105 in 2006 was related to 2005 activities.
During 2002, SAS began purchasing directly from MEGA certain
ancillary benefit products (including accidental death, hospital
confinement and emergency room benefits) for the benefit of the
membership associations that make available to their members the
Companys health insurance products. The aggregate amount
paid by SAS to MEGA for these benefit products was $822,000,
$11.3 million and $12.5 million in 2006, 2005 and
2004, respectively. Effective January 1, 2006, this
arrangement with SAS was terminated, and MEGA commenced
providing the ancillary benefit products directly to the
membership associations. The payment received by MEGA in 2006
was related to 2005 activities.
SAS reimburses MEGA for certain billing and collection services
that MEGA provides to membership associations members in
accordance with an agreement entered into effective
January 1, 1998. The aggregate amount paid by SAS to MEGA
for this reimbursement of services was $0, $211,000 and $274,000
in 2006, 2005 and 2004, respectively. Effective July 1,
2005, this arrangement with SAS was terminated. In addition,
during 2006, 2005 and 2004, SAS paid UICI Marketing $0, $55,000,
and $95,000, respectively, for various printing and video
services. The Company also received from SAS $2,000, $4,000 and
$4,000 during 2006, 2005 and 2004, respectively, for
reimbursement of expenses.
During 2004, the Company paid to SAS $8,000 for various services
and reimbursement of expenses. In 2005 and 2004, the Company
also paid $58,000 and $248,000, respectively, to Small Business
Ink (a division of Specialized Association Services) for
printing services. Small Business Ink was closed down in April
2005.
Transactions
with Certain Members of Management
Transactions
with National Motor Club
William J. Gedwed (a director and the Chief Executive Officer of
the Company) holds a 5.3% equity interest in NMC Holdings, Inc.
(NMC), the ultimate parent company of National Motor
Club of America (NMCA).
Effective January 1, 2003, MEGA and NMCA entered into an
administrative services agreement for a term ending on
December 31, 2004, pursuant to which MEGA agreed to issue
life, accident and health insurance polices
F-56
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to NMCA for the benefit of NMCA members in selected states.
NMCA, in turn, agreed to provide to MEGA certain administrative
and record keeping services in connection with the NMCA members
for whose benefit the policies have been issued. In 2004, NMCA
paid to MEGA the amount of $2.1 million in accordance with
the terms of the administrative services agreement. Effective
January 1, 2005, MEGA and NMCA entered into a new
three-year administrative agreement for a term ending on
December 31, 2007 on terms similar to those contained in
the agreement that terminated on December 31, 2004. During
2006 and 2005, NMCA paid to MEGA the amount of $1.1 million
and $957,000, respectively, pursuant to the terms of this
agreement.
During 2006, 2005 and 2004, NMCA paid the Company $270,000,
$209,000 and $202,000, respectively, for printing and various
other services. During 2006, 2005 and 2004, subsidiaries of NMCA
paid the Company an aggregate of $46,000, $135,000, and
$123,000, respectively, for printing and other services.
Employment
and Consulting Agreements
Under the terms of separate employment agreements with the
Company (the principal terms of which were requested by and
negotiated with The Blackstone Group after the key terms of the
Merger were agreed upon), each of William J. Gedwed (President
and Chief Executive Officer), Mark D. Hauptman (Vice President,
former Chief Accounting Officer and former Chief Financial
Officer), Troy A. McQuagge (President, Agency Marketing Group),
Phillip J. Myhra (Executive Vice President, Insurance Operations
and Risk Management), and James N. Plato (President, Life
Insurance Division (collectively, the Continuing
Executives) continue to serve in each of their respective
positions (other than Mr. Hauptman, who now serves as
Executive Vice President of the Companys Agency Marketing
Group) and receive an annual base salary in an amount not less
than their respective base salary immediately before the Merger.
The Continuing Executives are also eligible for an annual target
bonus ranging from a minimum of 75% of annual base salary to a
maximum of 200% of annual base salary. Each of the Continuing
Executives is also entitled to new equity award grants and
participation in employee benefit plans and has agreed to retain
all or a portion of their respective HealthMarkets equity and
equity-based awards. The employment agreements have an initial
employment term of two or three years from the Merger that
automatically renew annually upon the expiration of the initial
employment term, unless either party gives notice.
In addition, under the terms of their employment agreements, the
Continuing Executives are entitled to severance payments in the
event of their termination in certain specified circumstances.
The Continuing Executives would be entitled to receive severance
equal to two times the executives base salary plus target
bonus payable in monthly installments, continuation of welfare
benefits for two years, as well as a pro-rata bonus, based on
the executives target bonus, if such termination occurs
after the last day of the first quarter of the applicable fiscal
year. The Continuing Executives are entitled to full
change-of-control
parachute excise tax gross up protection on all payments and
benefits due to the executive, including such payments and
benefits due to the executive in connection with the Merger;
provided, however, that following a change of control of
HealthMarkets (other than in connection with the Merger), the
surviving corporation will be entitled to reduce the
executives payments (but not by more than 10%) if the
reduction would allow the avoidance of the imposition of any
excise tax associated with the change of control. In addition,
each of the Continuing Executives has agreed to two-year
post-termination non-competition and non-solicitation covenants.
In connection with the Merger, Timothy L. Cook (former President
of the Companys Star HRG Division) and William J. Truxal
(former President of MEGAs Student Insurance Division)
also executed employment agreements with the Company.
Mr. Cooks agreement terminated effective
July 11, 2006, upon the sale of substantially all of the
assets comprising the Companys Star HRG operations, and
Mr. Truxals agreement terminated effective
December 1, 2006, upon the sale of substantially all of the
assets comprising MEGAs Student Insurance Division.
On May 24, 2006, the Company entered into an agreement with
Glenn W. Reed, the former Executive Vice President and General
Counsel of the Company. The agreement provides, among other
things, that Mr. Reeds employment with the Company
would extend from the date of the agreement through the later of
June 30, 2006 or such date to which the Company and
Mr. Reed shall mutually agree (the termination
date), during which term
F-57
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Mr. Reed would continue to receive his annualized base
salary. The termination date was subsequently established by
Mr. Reed and the Company as August 31, 2006. Following
termination of the employment term, the Company has agreed to
pay to Mr. Reed termination payments in the aggregate
amount of $1.6 million, which will be paid in
24 monthly installments. The Company recorded an expense
for the entire $1.6 million in 2006. Mr. Reed is also
entitled to receive, at the Companys expense, the
Company-paid portion of the premium for continued participation
in the Companys medical, prescription drug, vision, dental
and life insurance coverage for the two-year period commencing
on the termination date. Upon the termination date,
Mr. Reed resigned from all offices, committees
and/or
directorships that he then held with the Company, its
subsidiaries and their respective affiliates. The agreement also
provides for full change of control parachute excise tax
gross-up
protection on all payments and benefits due to Mr. Reed. In
addition, he is subject to two-year post-termination
non-competition and non-solicitation restrictions.
Success
Bonus Award Plan
On September 14, 2005, the Companys board of
directors adopted a Success Bonus Award Plan as an employee
incentive and retention program to help retain and provide an
incentive to employees (including executive officers) who were
expected to be key to a successful completion of the Merger.
Under the terms of the Success Bonus Award Plan, a participant
was entitled to receive his or her award if the participant
continued to be employed by the Company or any of the
Companys subsidiaries through the date of completion of
any transaction resulting in a change of control of the Company
(including the Merger). If a participant ceased to be employed
before that date, he or she would not be entitled to an award,
unless the Executive Compensation Committee determined
otherwise. If the Merger (or another transaction that would
qualify as a change of control under the plan) was not completed
before June 30, 2006, participants would not have been
entitled to receive awards under the plan.
The total pool available for award to participants under the
plan was $20.3 million. In accordance with the terms of the
plan, on November 1, 2005 the Committee designated
participants in the plan and awarded success bonuses to be paid
to such participants at the times and in the manner as
prescribed by the plan. The Continuing Executives (i.e.,
Messrs. Gedwed, Hauptman, McQuagge, Myhra and Plato)
collectively were eligible to receive 61% of the bonus pool, or
approximately $12.4 million. Designated participants under
the plan included William J. Gedwed, Glenn W. Reed, Phillip J.
Myhra, Troy A. McQuagge and William J. Truxal, who were
allocated success bonuses in the amounts of $2.0 million,
$2.5 million, $3.4 million, $3.4 million and
$1.1 million, respectively. The remaining portion of the
pool ($7.9 million) was allocated among seven additional
designated participants. The success bonuses were paid in full
to participants on April 7, 2006.
Loan to
Management
At December 31, 2003, Mr. Gedwed had a loan payable to
the Company in the outstanding principal amount of $139,000. The
loan bore interest at 5.37% per annum, was scheduled to
mature on May 26, 2005, was full recourse to the borrower
and was payable in full upon the occurrence of certain events,
including the termination of employment. On November 8,
2004, Mr. Gedwed repaid in full the note payable to the
Company in the amount of $139,000.
Other
Transactions
On April 1, 2002, the Company, through a subsidiary,
entered into a Loan Servicing Agreement (as amended, the
Servicing Agreement) with Affiliated Computer
Services (formerly known as AFSA Data Corporation)
(ACS), pursuant to which ACS provides computerized
origination, billing, record keeping, accounting, reporting and
loan management services with respect to a portion of the
Companys CFLD-I student loan portfolio. Mr. Dennis
McCuistion, who was a director of the Company effective
May 19, 2004 through April 5, 2006, is also a director
of ACS. During 2006 (covering the period from January 1,
2006 through April 5, 2006), 2005 and
F-58
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2004 (for the period from May 19, 2004 through
December 31, 2004), the Company paid ACS $281,000, $725,000
and $397,000, respectively, pursuant to the terms of the
Servicing Agreement.
During 2004, the Company paid investment advisory fees in the
amount of $268,000 to The Chicago Trust Company. Mr. Stuart
D. Bilton (a director of the Company until May 19,
2004) formerly served as Vice Chairman of ABN AMRO Asset
Management Holdings, Inc., which in 2001 acquired The Chicago
Trust Company.
In accordance with the terms of a Consulting Agreement, dated
September 14, 1999, as amended, the Company formerly
retained Emerald Capital Group, Ltd. (for which Mr. Patrick
J. McLaughlin, who resigned as a director of the Company
effective January 27, 2004, serves as a managing director
and owner) to provide investment banking and insurance advisory
services for an annual fee of $400,000 plus expenses. During
2004 (covering the period from January 1, 2004 through
January 27, 2004), the Company paid an aggregate of
$103,000 in fees and expenses to Emerald Capital Group, Ltd. for
such services. Effective December 31, 2004, the Company
terminated its agreement with Emerald Capital Group, Ltd. with
respect to the provision of investment banking and insurance
advisory services.
In June 2000, Mr. Richard Mockler (a director of the
Company until April 5, 2006) purchased
2,000 shares of common stock of the Company in exchange for
cash in the amount of $6,000 and a promissory note in the amount
of $8,000. At December 31, 2004, the amount outstanding on
Mr. Mocklers note was $8,000. This note was repaid in
full on February 1, 2005.
Effective June 19, 2006, the Company entered into separate
agreements with each of R.H. Mick Thompson, Dennis McCuistion
and Richard Mockler (directors of the Company until
April 5, 2006), in accordance with which the former
directors agreed to provide certain advisory services and
assistance to the Company and its subsidiaries with respect to
insurance regulatory, governmental affairs, accounting, media
and public relations matters for a one year term commencing on
July 1, 2006 and ending on June 30, 2007. For such
services, the Company agreed to pay to each former director a
consulting fee in the amount of $300,000, which fee is payable
in equal quarterly installments in the amount of $75,000. The
Company recorded an aggregate expense in 2006 of $900,000
related to these agreements. The Company also agreed to
reimburse each former director for reasonable
out-of-pocket
business travel expenses and other reasonable
out-of-pocket
expenses related to the services to be provided under the
agreements, and the Company agreed to indemnify each of the
former directors for certain claims and expenses incurred in
connection with the engagement.
Note P
Commitments and Contingencies
The Company is a party to the following material legal
proceedings:
Academic
Management Services Corp. Related
Litigation
As previously disclosed, in May and June 2004, HealthMarkets and
certain officers and current and former directors of
HealthMarkets were named as defendants in four separate class
action suits arising out of HealthMarkets announcement in
July 2003 of a shortfall in the type and amount of collateral
supporting securitized student loan financing facilities of
Academic Management Services Corp., formerly a wholly-owned
subsidiary of HealthMarkets until its disposition in November
2003. On October 18, 2004, the four separate cases were
consolidated as a single action, In re HealthMarkets
Securities Litigation, Case
No. 3-04-CV-1149-P,
pending in the United States District Court for the Northern
District of Texas, Dallas Division. On May 27, 2005,
plaintiffs on behalf of the purported class of similarly
situated individuals who purchased HealthMarkets common stock
during the period commencing February 7, 2002 and ending on
July 21, 2003, filed a First Amended Consolidated Complaint
alleging among other things that HealthMarkets, AMS, the
Companys former chief financial officer, the
Companys former chief executive officer and AMS
former president failed to disclose all material facts relating
to the condition of AMS, in violation of Section 10(b) of
the Securities Exchange Act of 1934 and
Rule 10b-5
thereunder. On July 11, 2005, defendants filed a motion to
dismiss the consolidated complaint. The Court denied the
F-59
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
motion to dismiss the complaint on September 29, 2006. On
January 10, 2007, the parties participated in a mediation
of this matter, but a resolution was not reached.
HealthMarkets has agreed to advance the expenses of the
individual defendants incurred in connection with the defense of
the case, subject to the defendants undertaking to repay
such advances unless it is ultimately determined that they are
or would have been entitled to indemnification by HealthMarkets
under the terms of the Companys bylaws.
Association
Group Litigation
Introduction
The health insurance products issued by the Companys
insurance subsidiaries in the self-employed market are primarily
issued to members of various membership associations that make
available to their members the health insurance and other
insurance products issued by the Companys insurance
subsidiaries. The associations provide their membership with a
number of benefits and products, including the opportunity to
apply for health insurance underwritten by the Companys
health insurance subsidiaries. The Company
and/or its
insurance company subsidiaries have been a party to several
lawsuits that, among other things, challenge the nature of the
relationship between the Companys insurance companies and
the associations that have made available to their members the
insurance companies health insurance products.
Class Action
Opt Out Litigation
As previously disclosed, during 2004, the Company effected a
settlement of nationwide class action litigation (Eugene A.
Golebiowski, individually and on behalf of others similarly
situated, v. MEGA, UICI, the National Association for the
Self-Employed et al., initially filed in the United
States District Court for the Northern District of Mississippi,
Eastern Division; and Lacy v. The MEGA Life and Health
Insurance Company et al., initially filed in the
Superior Court of California, County of Alameda, Case
No. RG03-092881,
which cases were subsequently transferred to the United States
District Court for the Northern District of Texas, Dallas
Division (In re UICI Association-Group Insurance
Litigation, MDL Docket No. 1578)). As part of the
nationwide class action settlement process, on August 2,
2004 formal notice of the settlement terms was sent to 1,162,845
prospective class members, of which approximately 2,400
prospective class members (representing less than 0.2% of the
class) elected to opt out of the settlement. By
electing to opt out of the settlement, potential class members
(a) elected not to receive the class relief to which class
members are otherwise entitled under the terms of the settlement
and (b) retained the right to assert claims otherwise
released by the class members.
The Company and MEGA have been named as a party defendant in 15
lawsuits brought by plaintiffs represented by a single counsel
who have purportedly opted out of the class action settlement.
Generally, plaintiffs in the cases have asserted several causes
of action, including breach of contract, breach of fiduciary and
trust duties, fraudulent suppression, civil conspiracy, unjust
enrichment, fraud, negligence, breach of implied contract to
procure insurance, negligence per se, wantonness, conversion,
bad faith refusal to pay, and bad faith refusal to investigate.
At a mediation held on May 31, 2006, HealthMarkets, MEGA
and Mid-West agreed, without admitting or denying liability, to
finally and fully resolve all of these suits on terms
(individually and in the aggregate) that did not have a material
adverse effect upon the consolidated financial condition or
results of operations of HealthMarkets. The settlement also
includes a full release of possible claims against
HealthMarkets, MEGA, Mid-West and affiliates on behalf of
approximately 160 potential opt out claimants who had not yet
filed suit. The parties have executed definitive settlement
documentation and the settlement proceeds were tendered to the
settlement escrow agent on December 21, 2006. Final
resolution of these cases is subject to entry of individual
dismissal orders in each case. The settlement of these cases
will not affect other ongoing lawsuits that, as discussed below
under the captions California Litigation and
Other Association Group Litigation, challenge
(among other things) the nature of the relationship between the
Companys insurance companies and the associations that
have made available to their members the insurance
companies health insurance products.
F-60
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
California
Litigation
As previously disclosed, on September 26, 2003, the Company
and MEGA were named as cross-defendants in a lawsuit initially
filed on July 30, 2003 (Retailers Credit
Association of Grass Valley, Inc. v. Henderson
et al. v. UICI et al.) in the Superior Court
of the State of California for the County of Nevada, Case
No. L69072. In the suit, cross-plaintiffs asserted several
causes of action, including breach of the implied covenant of
good faith and fair dealing, fraud, violation of California
Business and Professions Code §17200, and negligent and
intentional misrepresentation. Cross-plaintiffs sought
injunctive relief and monetary damages in an unspecified amount.
On April 14, 2006, the Court issued an order for summary
judgment in favor of HealthMarkets, MEGA, the NASE and the
agent, effectively disposing of all remaining causes of action
against the defendants. On August 28, 2006, the Court
entered a final judgment in favor of all named defendants. On
October 27, 2006, plaintiffs filed a notice of appeal and
the Court has yet to rule thereon.
As previously disclosed, the Company and Mid-West were named as
defendants in an action filed on December 30, 2003
(Montgomery v. UICI et al.) in the Superior
Court of the State of California, County of Los Angeles, Case
No. BC308471. Plaintiff asserted statutory and common law
causes of action for both monetary and injunctive relief based
on a series of allegations concerning marketing and claims
handling practices. On March 1, 2004, the Company and
Mid-West removed the matter to the United States District Court
for the Central District of California, Western Division. On
May 11, 2004, the Judicial Panel on Multidistrict
Litigation issued a transfer order transferring the
Montgomery matter to the United States District Court for
the Northern District of Texas for coordinated pretrial
proceedings (In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578). On
February 20, 2007, the parties participated in a status
conference in this case and all other cases pending before the
Court in In re UICI Association-Group Insurance
Litigation, MDL Docket No. 1578 during which the Court
directed the parties to confer regarding the briefing schedule
for pretrial motions. The parties are engaged in ongoing
settlement discussions but there can be no assurance that a
settlement will be reached.
As previously disclosed, the Company and MEGA were named as
defendants in an action filed on January 20, 2004
(Springer et al. v. UICI et al.) in the
Superior Court of the State of California, County of Monterey,
Case No. M68493. Plaintiff has alleged that the undisclosed
relationship between MEGA and the NASE constituted
fraudulent and deceptive sales and advertising
practices and asserted several causes of action, including
breach of contract, breach of the duty of good faith and fair
dealing, violation of California Business and Professions Code
§ 17200, fraud, and negligent misrepresentation.
Plaintiff seeks injunctive relief and monetary damages in an
unspecified amount. The Springer matter was removed to
the United States District Court for the Northern District of
California, San Jose Division, on May 12, 2004.
HealthMarkets and MEGA have filed a motion to dismiss that is
pending before the Court. On July 1, 2004, the Judicial
Panel on Multidistrict Litigation issued an order transferring
the Springer matter to the United States District Court
for the Northern District of Texas for coordinated pretrial
proceedings (In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578). On
February 20, 2007, the parties participated in a status
conference in this case and all other cases pending before the
Court in In re UICI Association-Group Insurance
Litigation, MDL Docket No. 1578 during which the Court
directed the parties to confer regarding the briefing schedule
for pretrial motions. On March 2, 2007 MEGA proposed a
briefing and discovery schedule, but a scheduling order has not
been entered.
HealthMarkets and MEGA were named as defendants in an action
filed on October 5, 2005 (Charles H. Gardner v.
MEGA, HealthMarkets, et al) pending in the Superior
Court of Los Angeles County, California (the California
Court), Case No. BC340625. The plaintiff has asserted
violations of the California Consumers Legal Remedies Act,
breach of contract, breach of the implied covenant of good faith
and fair dealing, fraud, breach of fiduciary duty, negligence
and unfair competition. The plaintiff seeks monetary damages in
an unspecified amount and injunctive relief. On October 6,
2006, HealthMarkets, MEGA and HealthMarkets Lead Marketing
Group, Inc., filed a motion in the United States District Court
for the Northern District of Texas, Dallas Division (the
Texas Court), to enjoin plaintiff from pursuing
claims in this action that were the subject of a previous class
action settlement. As part of the previous settlement, the Texas
Court barred and permanently enjoined class members
F-61
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from reasserting, in another proceeding, claims that were the
subject of the settlement. On January 4, 2007, the Texas
Court granted the defendants motion and enjoined plaintiff
from pursuing claims that were the subject of the previous
settlement. On January 16, 2007, the California Court
granted MEGAs motion to dismiss these previously-asserted
claims. On January 25, 2007, plaintiff appealed the ruling
of the Texas Court enjoining plaintiff from pursuing claims that
were the subject of the previous settlement. A ruling on the
appeal is pending. On March 6, 2007, HealthMarkets and MEGA
filed with the California Court a motion to dismiss the balance
of plaintiffs claims, which motion was granted on
March 27, 2007.
As previously disclosed, HealthMarkets and MEGA were named as
defendants in an action filed on May 31, 2006 (Linda L.
Hopkins and Jerry T. Hopkins v. HealthMarkets, MEGA, the
National Association for the Self Employed, et al.)
pending in the Superior Court for the County of Los Angeles,
California, Case No. BC353258. Plaintiffs have alleged
several causes of action, including breach of fiduciary duty,
negligent failure to obtain insurance, intentional
misrepresentation, fraud by concealment, promissory fraud,
negligent misrepresentation, civil conspiracy, professional
negligence, negligence, intentional infliction of emotional
distress, and violation of the California Consumer Legal
Remedies, California Civil Code Section 1750, et seq.
Plaintiffs seek injunctive relief, disgorgement of profits and
general and punitive monetary damages in an unspecified amount.
MEGA has filed a motion to dismiss these claims and
HealthMarkets has filed a motion to quash. Rulings on
MEGAs and HealthMarkets motions are pending.
As previously disclosed, HealthMarkets and MEGA were named as
defendants in an action filed on July 25, 2006
(Christopher Closson, individually, and as Successor in
interest to Kathy Closson, deceased v. HealthMarkets, MEGA,
National Association for the Self-Employed, et al.)
pending in the Superior Court for the County of Riverside,
California, Case No. RIC453741. Plaintiff has alleged
several causes of action, including breach of fiduciary duty,
negligent failure to obtain insurance, fraud by concealment,
promissory fraud, civil conspiracy, professional negligence,
negligence, intentional infliction of emotional distress, and
violation of the California Consumer Legal Remedies Act.
Plaintiff seeks injunctive relief, and general and punitive
monetary damages in an unspecified amount. On September 8,
2006, HealthMarkets and MEGA filed a motion in the United States
District Court for the Northern District of Texas, Dallas
Division, to enjoin plaintiff from pursuing claims in this
action that were the subject of a previous class action
settlement. As part of the previous settlement, the Court barred
and permanently enjoined class members from reasserting, in
another proceeding, claims that were the subject of the
settlement. A ruling on HealthMarkets and MEGAs
motion is pending.
California
Petition for Coordination
On August 7, 2006, the plaintiffs in several California
state court actions pending against HealthMarkets
and/or MEGA,
including the Henderson, Springer, Gardner,
Hopkins and Closson matters, sought to coordinate
these cases before the Complex Litigation Panel in Los Angeles
County, California. Plaintiffs allege that these cases arose out
of common questions of fact and law and that the matters should
be coordinated because the actions are complex. HealthMarkets
and MEGA opposed this motion and on January 31, 2007, the
Court denied the application for coordination, holding that the
cases did not satisfy the complexity and other requirements of
California law applicable to coordination.
Other
Association Group Litigation
As previously disclosed, the Company and MEGA were named as
defendants in an action filed on February 11, 2002
(Martha R. Powell and Keith P. Powell v. UICI, MEGA, the
National Association for the Self-Employed et al.)
pending in the Second Judicial District Court for the County of
Bernalillo, New Mexico, Cause
No. CV-2
002-1156.
Plaintiffs have alleged breach of contract, fraud, negligent
misrepresentation, civil conspiracy, breach of third-party
beneficiary contract, breach of the duty of good faith and fair
dealing, breach of fiduciary duty, negligence, and violations of
the New Mexico Insurance Practices Act, the New Mexico Insurance
Code, and the New Mexico Unfair Practices Act. Plaintiff seeks
injunctive relief and monetary damages in an unspecified amount.
Discovery is
F-62
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ongoing in this matter. The parties are developing a case
scheduling order with an anticipated trial date in October 2007.
On August 4, 2006, HealthMarkets and MEGA filed a motion in
the United States District Court for the Northern District of
Texas, Dallas Division, to enjoin plaintiff from pursuing claims
in this action that were the subject of a previous class action
settlement. As part of the previous settlement, the Court barred
and permanently enjoined class members from reasserting, in
another proceeding, claims that were the subject of the
settlement. A ruling on HealthMarkets and MEGAs
motion is pending.
The Company currently believes that resolution of the above
proceedings will not have a material adverse effect on the
Companys financial condition or results of operations.
Commonwealth
of Massachusetts Litigation
On October 23, 2006, MEGA was named as a defendant in an
action filed by the Commonwealth of Massachusetts
(Commonwealth of Massachusetts v. The MEGA Life and
Health Insurance Company), pending in the Superior Court of
Suffolk County, Massachusetts, Case Number
06-4411. The
Complaint was served on MEGA on or around January 19, 2007.
Plaintiff has alleged that MEGA engaged in unfair and deceptive
practices by issuing policies that contained exclusions of, or
otherwise failed to cover, certain benefits mandated under
Massachusetts law. In addition, plaintiff has alleged that MEGA
violated Massachusetts laws that (i) require health
insurance policies to provide coverage for outpatient
contraceptive services to the extent the policies provide
coverage for other outpatient services and (ii) limit
exclusions of coverage for pre-existing conditions.
Investigation of this matter by the Massachusetts Attorney
General is ongoing. By agreement of the parties, the suit has
been stayed through May 7, 2007 while the Attorney General
continues its investigation. The Company currently believes that
the resolution of this proceeding will not have a material
adverse effect on the Companys financial condition or
results of operation.
Other
Litigation Matters
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. The Company believes that the liability, if any,
resulting from the disposition of such proceedings, claims,
demands, disputes or matters would not be material to the
Companys financial condition or results of operations.
Regulatory
Matters
In March 2005, HealthMarkets received notification that the
Market Analysis Working Group of the National Association of
Insurance Commissioners had chosen the states of Washington and
Alaska to lead a multi-state market conduct examination of
HealthMarkets principal insurance subsidiaries. We believe
that approximately 34 states have elected to participate in
the examination, which commenced in May 2005 and is ongoing. The
examiners have completed the onsite phases of the examination.
An exit interview was held on July 17, 2006, in which
representatives of the lead states and the Company participated.
The Company expects to receive a draft of the examination report
in the near future and will respond to the draft report in a
timely manner.
While we do not currently believe that the multi-state market
conduct examination will have a material adverse effect upon our
consolidated financial position or results of operations, state
insurance regulatory agencies have authority to levy monetary
fines and penalties resulting from findings made during the
course of such examinations.
On December 6, 2006, MEGA, Mid-West and Chesapeake, entered
into a settlement agreement with the Massachusetts Division of
Insurance (MA DOI) upon the conclusion of a market conduct
examination by the MA
F-63
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DOI. The examination consisted of a review of the operations of
MEGA, Mid-West and Chesapeake for small group health insurance
issued to Massachusetts certificate holders for the period
January 1, 2002 to December 31, 2004. The settlement
agreement provides, among other things, for changes in certain
Company operations and procedures, including those related to
claims handling, complaints and grievances, marketing and sales
and underwriting. In addition, MEGA, Mid-West and Chesapeake
agreed to conduct a claims reassessment process, pursuant to
which the companies are contacting certain Massachusetts
claimants and offering to reassess certain denied claims based
on specific codes identified by the MA DOI. The reassessment
covers claims for the period January 1, 2002 through
December 31, 2004, as well as claims on certificates issued
through April 30, 2005 or renewed through July 31,
2005 to the date of their first renewal or lapse. In entering
the settlement, the Company did not admit, deny or concede any
actual or potential fault, wrongdoing, liability or violation of
law. The MA DOI will not impose fines or take other action
against the Company unless the Company fails to complete the
required actions set forth in the settlement agreement or unless
additional material information related to the required actions
becomes available to the MA DOI. The Company believes that the
terms of the settlement will not have a material adverse effect
upon the financial condition or result of operations of the
Company.
The Companys insurance subsidiaries are subject to various
other pending market conduct examinations arising in the
ordinary course of business. 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 market conduct examinations. The Company believes
that the liability, if any, resulting from such examinations
would not be material to the Companys financial condition
or results of operations.
By letter dated March 11, 2005, the Boston Office of the
U.S. Department of Labor informed the Company that certain
policy forms in use by Mid-West in Massachusetts may not be
compliant with provisions of ERISA and certain other federal
laws applicable to health insurers in the group market. On
November 7, 2005, the Boston Office of the
U.S. Department of Labor informed the Company that it had
concluded a review of insurance contracts marketed by the
Companys insurance subsidiaries in the New England region
and identified certain alleged violations of ERISA. The Company
disputes many of the allegations raised by the Department of
Labor, primarily on the basis that most of the policy forms
under review are not subject to ERISA because they are offered
to and used by individuals, self-employed persons or employers
with less than two participants who are employees as of the
start of any plan year. The Company has presented a plan to the
Department of Labor to resolve these matters. The plan would
involve, among other things, identifying the nationwide
population of insurance contracts marketed to ERISA groups and
amending or otherwise adjusting these contracts to bring them
into compliance with ERISA and implementing a training program
designed to educate its customer service representatives and
independent agents about the application of ERISA to certain
business. The Department of Labor has not yet approved the
Companys proposed plan and its review is ongoing. By
letter dated January 6, 2006, the Dallas Office of the
U.S. Department of Labor requested information in
connection with a review of the Companys policy forms, but
since that date the Dallas Office of the U.S. Department of
Labor has not pursued such request in recognition of the
parallel investigation being conducted by the Boston Office of
the U.S. Department of Labor. The Company currently does
not believe that these matters, or the terms of the proposed
plan presented to the Department of Labor, will have a material
adverse effect on the Companys financial condition or
results of operations.
Other
Commitments and Contingencies
The Company and its subsidiaries lease office space and data
processing equipment under various lease agreements with initial
lease periods of three to ten and one-half years. Minimum lease
commitments at December 31, 2006 were $5.1 million in
2007, $3.2 million in 2008, $2.5 million in 2009,
$1.5 million in 2010, $6,000 in 2011 and $-0- thereafter.
Rent expense was $8.5 million, $9.2 million and
$8.1 million for the years ended December 31, 2006,
2005 and 2004, respectively.
Through its former College Fund Life Division life
insurance operations, the Company has committed to assist in
funding the higher education of its insureds with student loans.
As of December 31, 2006, the Company, through
F-64
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
its College Fund Life Insurance Division, had outstanding
commitments to fund student loans for the years 2007 through
2026. The Company has historically funded its College
Fund Life Division student loan commitments with the
proceeds of indebtedness issued by a bankruptcy-remote special
purpose entity (the SPE). At December 31, 2006,
$7.2 million of cash, cash equivalents and other qualified
investments held by the SPE were available to fund the purchase
from the Company of additional student loans generated under the
Companys College First Alternative Loan program. The
indenture governing the terms of the SPE Notes provides,
however, that the proceeds of such SPE Notes may be used to fund
the student loan commitments only until February 1, 2007,
after which monies then remaining on deposit in the acquisition
fund created by the indenture not used to purchase additional
student loans must be used to redeem the SPE Notes. After
February 1, 2007, the Company will fund loans with cash on
hand at HealthMarkets LLC. See Note J.
Loans issued to students under the College Fund Life
Division program are limited to the cost of school or prescribed
maximums. These loans are generally guaranteed as to principal
and interest by an appropriate guarantee agency and are also
collateralized by either the related insurance policy or the
co-signature of a parent or guardian.
The total commitment for the next five school years and
thereafter as well as the amount the Company expects to fund
considering utilization rates and lapses are as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Expected
|
|
|
|
Commitment
|
|
|
Funding
|
|
|
|
(In thousands)
|
|
|
2007
|
|
$
|
35,903
|
|
|
$
|
3,364
|
|
2008
|
|
|
30,427
|
|
|
|
2,913
|
|
2009
|
|
|
27,302
|
|
|
|
2,518
|
|
2010
|
|
|
28,758
|
|
|
|
2,246
|
|
2011
|
|
|
32,144
|
|
|
|
1,981
|
|
2012 and thereafter
|
|
|
115,276
|
|
|
|
3,826
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
269,810
|
|
|
$
|
16,848
|
|
|
|
|
|
|
|
|
|
|
Interest rates on the above commitments are principally variable
(prime plus 2%).
At each of December 31, 2006 and 2005, the Company had
$9.6 million and $5.2 million, respectively, of
letters of credit outstanding relating to its insurance
operations.
Note Q
Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with UGA Association
Field Services, New United Agency and Cornerstone America.
The Agent Plans generally combine an agent-contribution feature
and a Company-match feature. The agent-contribution feature
generally provides that eligible participants are permitted to
allocate a portion (subject to prescribed limits) of their
commissions or other compensation earned on a monthly basis to
purchase shares of HealthMarkets
Class A-2
common stock at the fair market value of such shares at the time
of purchase. Under the Company-match feature of the Agent Plans,
participants are eligible to have posted to their respective
Agent Plan accounts book credits in the form of equivalent
shares based on the number of shares of HealthMarkets
Class A-2
common stock purchased by the participant under the
agent-contribution feature of the Agent Plans. The
matching credits vest over time (generally in
prescribed increments over a ten-year period, commencing the
plan year following the plan year during which contributions are
first made under the agent-contribution feature), and vested
matching credits in a participants plan account in January
of each year are converted from book credits to an equivalent
number of shares of HealthMarkets
Class A-2
common stock. Matching credits forfeited by participants no
longer eligible to participate in the Agent Plans are
reallocated each year among eligible participants and
F-65
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
credited to eligible participants Agent Plan accounts.
Share requirements of the Agent Plans may be met from either
unissued or treasury shares.
The Agent Plans do not constitute qualified plans under
Section 401(a) of the Internal Revenue Code of 1986 or
employee benefit plans under the Employee Retirement Income
Security Act of 1974 (ERISA), and the Agent Plans
are not subject to the vesting, funding, nondiscrimination and
other requirements imposed on such plans by the Internal Revenue
Code and ERISA.
For financial reporting purposes, the Company accounts for the
Company-match feature of its Agent Plans 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 participants. The Company
estimates its current liability for unvested matching credits by
reference to the number of unvested credits, prevailing
fair market value (as determined by the
Companys Board of Directors since the Merger) of the
Companys
Class A-2
common stock, and the Companys estimate of the percentage
of the vesting period that has elapsed up to the current quarter
end. Changes in the liability from one quarter to the next are
accounted for as an increase in, or decrease to, compensation
expense, as the case may be. Upon vesting, the Company reduces
the accrued liability (equal to the market value of the vested
shares at date of vesting) with a corresponding increase to
equity. Unvested matching credits are considered share
equivalents outstanding for purposes of the computation of
earnings per share. At December 31, 2006 and 2005, the
Companys liability for future unvested benefits payable
under the Agent Plans was $46.9 million and
$36.8 million, respectively, which has been recorded in
Other liabilities on the Companys consolidated
balance sheet.
The portion of compensation expense associated with the Agent
Plans reflected in the results of the Self-Employed Agency
(SEA) Division is based on the prevailing valuation
of
Class A-2
common shares (as determined by the Board of Directors of the
Company since the Merger or, prior to the Merger, by reference
to the fair value of the Companys common shares) on or
about the time the unvested matching credits are granted to
participants. In accordance with the terms of the Agent Plans,
the Board of Directors of the Company establishes the fair
market value of
Class A-2
common shares on a quarterly basis. The remaining portion of the
compensation expense associated with the Agent Plans (consisting
of variable stock-based compensation expense) is reflected in
the results of the Companys Other Key Factors
business segment.
Set forth in the table below is the total compensation expense
associated with the Companys Agent Plans for each of the
years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
SEA Division stock-based
compensation expense(1)
|
|
$
|
11,188
|
|
|
$
|
9,397
|
|
|
$
|
21,206
|
|
Other Key Factors variable
non-cash stock-based compensation expense(2)
|
|
|
16,603
|
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Agent Plan compensation
expense
|
|
|
27,791
|
|
|
|
16,611
|
|
|
|
35,513
|
|
Related tax benefit
|
|
|
9,727
|
|
|
|
5,814
|
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount included in financial
results
|
|
$
|
18,064
|
|
|
$
|
10,797
|
|
|
$
|
23,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the cost of
Class A-2
common shares (determined by reference to the prevailing fair
value of
Class A-2
common shares as determined by the Board of Directors of the
Company or, prior to the Merger, by reference to the market
price of HealthMarkets common shares) on or about the time that
unvested matching credits are granted to participants in the
Agent Plan. This amount is reflected in the caption
Underwriting, policy acquisition costs, and insurance
expenses on the Companys Consolidated Statement of
Operations. |
|
(2) |
|
Represents the total stock-based compensation expense associated
with the Agent Plans less the expense incurred by the Company on
or about the time that unvested matching credits are granted to
participants in the |
F-66
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Agent Plan. This amount is reflected in the caption
Variable stock compensation expense on the
Companys Consolidated Statement of Operations. |
At December 31, 2006, the Company had recorded 1,373,456
unvested matching credits associated with the Agent Plans, of
which 423,145 vested in January 2007.
Company-match transactions are not reflected in the Consolidated
Statement of Cash Flows since issuance of equity securities to
settle the Companys liabilities under the Agent Plans are
non-cash transactions.
Effective on April 5, 2006, upon closing of the Merger, the
Agent Plans were amended and restated to afford participants the
opportunity to purchase, with after-tax dollars, shares of the
Companys
Class A-2
common stock, which purchases are matched with book
credits in the form of equivalent
Class A-2
common shares. Effective upon the closing of the Merger, each
share of HealthMarkets common stock then owned by a participant
under the Agent Plans was converted into the right to receive
one share of the Companys
Class A-2
common stock, and each matching credit then posted to a
participants account under the Agent Plans then
represented an equivalent book credit representing one share of
the Companys
Class A-2
common stock.
The accounting treatment of the Companys Agent Plans has
resulted, and will continue to result, in unpredictable
stock-based compensation charges, dependent upon fluctuations in
the fair value (as determined by the Board of Directors of the
Company since the Merger) of HealthMarkets
Class A-2
common stock. These fluctuations in stock-based compensation
charges may result in material fluctuations in the
Companys results of operations. In periods of general
decline in the fair value of HealthMarkets
Class A-2
common stock, if any, the Company will recognize less
stock-based compensation expense than in periods of general
appreciation in the fair value of HealthMarkets
Class A-2
common stock. In addition, in circumstances where increases in
the fair value of HealthMarkets
Class A-2
common stock are followed by declines in the fair value of
HealthMarkets
Class A-2
common stock, negative stock-based compensation expense may
result as the Company adjusts the cumulative liability for
unvested stock-based compensation expense.
Note R
Employee 401(k) and Stock Plans
HealthMarkets
401(k) and Savings Plan
The Company maintains for the benefit of its and its
subsidiaries employees the HealthMarkets 401(k) and
Savings Plan (the Employee Plan). The Employee Plan
enables eligible employees to make pre-tax contributions to the
Employee Plan (subject to overall limitations), to receive from
HealthMarkets and its subsidiaries discretionary matching
contributions and to share in certain supplemental contributions
made by HealthMarkets and its subsidiaries. The participants
direct the investment of such pre-tax, matching and supplemental
contributions among several investment options. Contributions by
HealthMarkets and its subsidiaries to the Employee Plan
currently vest in prescribed increments over a six year period.
Prior to the Merger, the Employee Plan, through its 401(k)
feature, enabled eligible employees to make pre-tax
contributions to the Employee Plan (subject to overall
limitations) and to direct the investment of such contributions
among several investment options, including HealthMarkets common
stock. A second feature of the pre-merger Employee Plan
constituted an employee stock ownership plan (the
ESOP), contributions to which were invested
primarily in shares of HealthMarkets common stock. The ESOP
feature allowed participants to receive from HealthMarkets and
its subsidiaries discretionary matching contributions and to
share in certain supplemental contributions made by
HealthMarkets and its subsidiaries. Contributions by
HealthMarkets and its subsidiaries to the Employee Plan under
the ESOP feature vested in prescribed increments over a six year
period. The ESOP shares were considered outstanding for purposes
of the computation of earnings per share.
In 2006, 2005 and 2004, the Company made supplemental
contributions to the Employee Plan in accordance with its terms
in the amount of $3.9 million, $4.0 million and
$3.5 million, respectively. In 2006, 2005 and 2004, the
F-67
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company made matching contributions to the Employee Plan in
accordance with its terms in the amount of $2.6 million,
$2.7 million and $2.2 million, respectively.
Employee
Stock Plans
The Company adopted FASB Statement 123 (revised 2004),
Shared-Based Payment
(Statement 123R), on January 1,
2006 using the modified prospective transition method. Among
other things, Statement 123R requires expensing the fair
value of stock options, a previously optional accounting method
that the Company voluntarily adopted in 2003. For the year ended
December 31, 2006, the impact of the transition to
Statement 123R to the Companys income from continuing
operations, net of income taxes, was a reduction in net earnings
of $27,000 to expense the unvested portion of options granted
prior to 2003.
At December 31, 2006, the Company had various share-based
plans for employees and directors, which plans are described
below. Set forth below are amounts recognized in the financial
statements with respect to these plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Amounts included in reported
financial results:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of Stock Option Plans(1)
|
|
$
|
3,734
|
|
|
$
|
1,006
|
|
|
$
|
143
|
|
Total cost of Restricted Stock
Plan(2)
|
|
|
84
|
|
|
|
130
|
|
|
|
347
|
|
Total cost of Other Stock-Based
Plans(3)
|
|
|
6,496
|
|
|
|
5,203
|
|
|
|
6,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount charged against income,
before tax
|
|
|
10,314
|
|
|
|
6,339
|
|
|
|
6,933
|
|
Related tax benefit
|
|
|
3,610
|
|
|
|
2,219
|
|
|
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense included in financial
results
|
|
$
|
6,704
|
|
|
$
|
4,120
|
|
|
$
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2006 includes $2.3 million as a result of the
acceleration of vesting related to the Merger. |
|
(2) |
|
In 2006 includes $65,000 as a result of the acceleration of
vesting related to the Merger. |
|
(3) |
|
In 2006 includes $1.0 million as a result of the
acceleration of vesting related to the Merger. |
The Company classified $1.4 million, $1.9 million and
$2.0 million of tax benefits from share-based compensation
as cash from financing activities in 2006, 2005 and 2004,
respectively.
1987
Stock Option Plan
In accordance with the terms of the Companys 1987 Stock
Option Plan, as amended (the 1987 Plan),
4,000,000 shares of common stock of the Company have been
reserved for issuance upon exercise of options that may be
granted to officers, key employees, and certain eligible
non-employees at an exercise price equal to the fair market
value at the date of grant. The options generally vest in 20%
annual increments every twelve months, subject to continuing
employment, provided that an option will vest 100% upon death,
permanent disability, or change of control of the Company. Share
requirements may be met from either unissued or treasury shares.
In connection with the Merger, each outstanding option to
purchase shares of HealthMarkets common stock formerly granted
under the 1987 Plan became fully vested. Options to purchase
249,251 shares under the 1987 Plan were cancelled and
converted into the right to receive a payment (subject to any
applicable withholding taxes) equal to the difference between
$37.00 and the exercise price for the option. The Company paid
$4.4 million in connection with the conversion of such
options. Options to purchase 359,582 shares held by certain
executive officers were converted into 121,528 options to
acquire shares of
Class A-1
common stock at an exercise prices of $9.25 and options to
purchase 448 shares were converted into 448 options to
acquire shares of
Class A-1
common stock at an exercise prices of $9.00. No additional
expense was recognized because of these modifications.
F-68
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
HealthMarkets
2006 Management Stock Option Plan
On May 8, 2006, the Board of Directors of HealthMarkets
adopted the HealthMarkets 2006 Management Stock Option Plan (the
2006 Plan), in accordance with which options to
purchase up to an aggregate of 1,489,741 shares of the
Companys
Class A-1
common stock may be granted from time to time to officers,
employees and non-employee directors of the Company or any
subsidiary. Share requirements may be met from either unissued
or treasury shares.
During 2006, non-qualified options to purchase shares of
Class A-1
common stock were granted under the 2006 Plan to 78 employees
(the Employee Options) and 4 non-employee directors
(the Director Options). One-third of the Employee
Options vest in 20% increments over five years with an exercise
price equal to the fair market value per share at the date of
grant (the Time-Based Options). One-third of the
Employee Options vest in increments of 25%, 25%, 17%, 17% and
16% over five years, provided that the Company shall have
achieved certain specified performance targets, with an exercise
price equal to the fair market value on the date of grant (the
Performance-Based Options). Any Performance-Based
Options as to which an optionee does not earn the right to
exercise in any year shall expire and terminate. The remaining
one-third of the Employee Options vest in increments of 25%,
25%, 17%, 17% and 16% over five years with an initial exercise
price equal to the fair market value at the date of grant. The
exercise price increases 10% each year beginning on the second
anniversary of the grant date and ending on the fifth
anniversary of the grant date (the Tranche C
Options). Director Options vest in 20% increments over
five years. Director Options, Time Based Options,
Performance-Based Options and Tranche C Options expire ten
years following the grant date and become immediately
exercisable upon the occurrence of a Change in
Control (as defined) if the optionee remains in the
continuous employ of the Company or any subsidiary until the
date of the consummation of such Change in Control.
On August 30, 2006, company-wide performance goals were
established and the Company began recognizing expense for the
first vesting tranche of the Performance-Based Options granted
in 2006. At December 31, 2006, performance goals for the
remaining four vesting tranches of the Performance-Based Options
had not been established. Accounting rules require that the
Company and the employee have a mutual understanding of the key
terms and conditions of an award before the award is considered
granted. Because performance goals have not been established on
certain Performance-Based options, the fair value of the grant
cannot be determined and no compensation expense has been
recorded for these options.
In June 2006, the Company cancelled and replaced 542,000
non-qualified options that were originally issued in May 2006 to
10 employees in order to meet the performance-based exceptions
of otherwise non-deductible executive compensation in excess of
$1.0 million. Of the 542,000 options that were cancelled
and reissued, 180,668 were Performance-Based Options for which
no performance criteria have been, or were previously,
established. These 180,668 Performance-Based Options are not
considered granted for accounting purposes. The replacement
options were granted at an exercise price of $37.00 per
share, which represented the fair value of
Class A-1
common stock as determined by the Board of Directors on the date
of grant. The replacement options expire 10 years following
the grant date. All other terms of the replacement options were
equivalent to the terms of the options originally granted in May
2006. In connection with the cancellation and replacement of the
options, the Company will recognize incremental compensation
expense in the amount of $12,000 over the expected life of the
replacement options.
Set forth below is a summary of stock option transactions
including certain information with respect to the
Performance-Based Options for which no performance goals have
been established.
F-69
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding for Accounting
|
|
|
Performance-Based Options
|
|
|
Combined
|
|
|
|
(Excludes Options with no Performance Criteria)
|
|
|
No Performance Goals Established(a)
|
|
|
Total
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Option
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
Remaining
|
|
|
|
|
|
|
Number of
|
|
|
Share
|
|
|
Value ($)
|
|
|
Contractual
|
|
|
Number of
|
|
|
Share
|
|
|
Value ($)
|
|
|
Contractual
|
|
|
Number of
|
|
|
|
Shares
|
|
|
($)
|
|
|
in (000s)
|
|
|
Term
|
|
|
Shares
|
|
|
($)
|
|
|
in (000s)
|
|
|
Term
|
|
|
Shares
|
|
|
Outstanding options at
January 1, 2006
|
|
|
624,481
|
|
|
|
23.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624,481
|
|
Granted(b)
|
|
|
1,383,909
|
|
|
|
35.06
|
|
|
|
|
|
|
|
|
(d)(e)
|
|
|
451,271
|
|
|
|
37.32
|
|
|
|
|
|
|
|
|
|
|
|
1,835,180
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled(c)
|
|
|
(978,964
|
)
|
|
|
29.05
|
|
|
|
|
|
|
|
|
(e)
|
|
|
(183,269
|
)
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
|
|
(1,162,233
|
)
|
Exercised
|
|
|
(38,313
|
)
|
|
|
8.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at
December 31, 2006
|
|
|
991,113
|
|
|
|
34.96
|
|
|
|
14,909
|
|
|
|
8.8
|
|
|
|
268,002
|
|
|
|
37.54
|
|
|
|
3,339
|
|
|
|
9.6
|
|
|
|
1,259,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31, 2006
|
|
|
97,863
|
|
|
|
9.25
|
|
|
|
3,988
|
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,863
|
|
Options expected to vest
|
|
|
713,040
|
|
|
|
37.77
|
|
|
|
8,721
|
|
|
|
8.8
|
|
|
|
213,381
|
|
|
|
37.54
|
|
|
|
2,659
|
|
|
|
9.6
|
|
|
|
926,421
|
|
|
|
|
(a) |
|
Includes Performance-Based Options where no performance criteria
have been established. Represents final four vesting tranches. |
|
(b) |
|
Includes 121,528 fully vested options that were issued upon
modification of 359,582 previously issued stock options in
connection with the Merger. Includes 87,574 Performance-Based
Options for which performance goals were established on
August 30, 2006. |
|
(c) |
|
Includes 249,251 vested options settled in connection with the
Merger. Includes 359,582 options modified and converted into
121,528 options to purchase
Class A-1
common stock in connection with the Merger. Includes 361,332
options cancelled and reissued in order to meet the
performance-based exceptions of otherwise non-deductible
compensation in excess of $1.0 million under
Section 162(m) of the Internal Revenue Code. Also includes
8,799 options forfeited on termination of employment. Excludes
448 options that were converted to options to purchase
Class A-1
common stock in connection with the Merger that had no
modification to the terms. |
|
(d) |
|
Excludes 87,574 options where performance was not defined at
grant but was established on August 30, 2006. |
|
(e) |
|
Includes 180,668 Performance-Based Options for which no
performance was established when cancelled and reissued. See
(c) above. Also includes 2,601 Performance-Based forfeited
on termination for which no performance goals have been
established. |
Set forth below is a summary of the 2006 Plan stock options
(including Performance-Based Options for which no performance
goals have been established) outstanding and exercisable at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
|
|
Options
|
|
|
Average
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
|
December 31,
|
|
|
Remaining
|
|
|
Price
|
|
|
December 31,
|
|
|
Price
|
|
Exercise Prices
|
|
2006
|
|
|
Contractual Life
|
|
|
($)
|
|
|
2006
|
|
|
($)
|
|
|
$9.25
|
|
|
97,863
|
|
|
|
2.4 years
|
|
|
|
9.25
|
|
|
|
97,863
|
|
|
|
9.25
|
|
$37.00
|
|
|
755,878
|
|
|
|
9.5 years
|
|
|
|
37.00
|
|
|
|
|
|
|
|
|
|
$38.37
|
|
|
367,443
|
|
|
|
9.7 years
|
|
|
|
38.37
|
|
|
|
|
|
|
|
|
|
$39.66
|
|
|
31,175
|
|
|
|
9.9 years
|
|
|
|
39.66
|
|
|
|
|
|
|
|
|
|
$74.00
|
|
|
6,756
|
|
|
|
9.5 years
|
|
|
|
74.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,259,115
|
|
|
|
|
|
|
|
|
|
|
|
97,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company measures the fair value of the Time-Based Options,
Performance-Based Options and Director Options at the date of
grant using a Black-Scholes option pricing model. The Company
measures fair value of the Tranche C options using a
binomial option valuation model. The weighted-average grant-date
fair value of stock options granted during 2006, 2005, and 2004
was $11.27, $8.43 and $6.48 per option, respectively. Set
forth below are the assumptions used in arriving at the fair
value of options during 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
Black-Scholes Values
|
|
|
Binomial values
|
|
Expected volatility
|
|
|
43.53
|
%
|
|
|
50.70
|
%
|
|
|
55.00
|
%
|
|
40.34% 45.07%
|
Expected dividend yield
|
|
|
5.08
|
%
|
|
|
1.78
|
%
|
|
|
0.09
|
%
|
|
5.08%
|
Risk-free interest rate
|
|
|
4.99
|
%
|
|
|
3.77
|
%
|
|
|
2.66
|
%
|
|
4.50% 5.3%
|
Expected life in years
|
|
|
7.37
|
|
|
|
3.00
|
|
|
|
3.00
|
|
|
6.92 9.03
|
Weighted-average grant date fair
value
|
|
$
|
11.56
|
|
|
$
|
8.43
|
|
|
$
|
6.48
|
|
|
$10.88
|
Risk-free interest rates are derived from the U.S. Treasury
strip yield curve in effect at the time of the grant. The
expected life of options valued in 2005 and 2004 was estimated
based on historical data. The expected life of the options,
valued in 2006 with both the Black-Scholes and the binomial
pricing models, was derived from output of a binomial model and
represents the period of time that the options are expected to
be outstanding. Binomial option pricing models incorporate
ranges of assumptions for inputs, and those ranges are
disclosed. For 2006, expected volatilities were calculated as
one-third of the Companys historical volatility for the
time period, plus one-third of the average historical volatility
of comparable companies during the time period, plus one-third
of average implied volatility of comparable companies. For 2005
and 2004, expected volatility was derived from the
Companys historical volatility data. The Company utilized
historical data to estimate share option exercise and employee
departure behavior.
The total intrinsic value of options exercised during 2006, 2005
and 2004 was $1.1 million, $4.4 million and
$5.6 million, respectively. At December 31, 2006 there
was $6.2 million of unrecognized compensation cost related
to non-vested stock options. This compensation expense is
expected to be recognized over a weighted average period of
4.5 years.
Restricted
Stock Grants
The Company formerly granted restricted stock to employees under
various restricted stock plans. The Company was authorized by
the various restricted stock plans to issue up to
500,000 shares of unissued or treasury shares under the
plans. Until the lapse of certain restrictions generally
extending over a two-year period, all restricted shares were
subject to forfeiture if a grantee ceased to provide material
services to the Company as an employee for any reason other than
death. Upon death or a Change in Control (as defined) of the
Company, the shares of restricted stock were no longer subject
to forfeiture.
In connection with the Merger (see Note B), all
applicable forfeiture provisions of the 14,000 then-outstanding
restricted shares lapsed, to the extent not already lapsed. The
Board of Directors cancelled all restricted stock plans
effective August 30, 2006 and shares can no longer be
issued under the plans.
Other
Stock-Based Compensation Plans
At December 31, 2006, the Company had in place various
stock-based incentive programs, pursuant to which the Company
has agreed to distribute, in cash, an aggregate of the dollar
equivalent of 275,799 HealthMarkets shares to eligible
participants of each program. Distributions under the programs
vary from 25% annual payments to 100% payment at the end of four
years. In 2006, the Company distributed the dollar equivalent of
330,866 HealthMarkets shares. During 2006, 2005 and 2004,
the Company paid $12.5 million, $2.0 million and
$321,000, respectively, under these plans. For financial
reporting purposes, the Company recognizes compensation expense,
F-71
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
adjusted to the value of HealthMarkets shares at each
accounting period, over the required service period. At
December 31, 2006 and 2005, the Companys liability
for future benefits payable under the programs was
$4.5 million and $10.6 million, respectively.
Note S
Investment Annuity Segregated Accounts
At December 31, 2006 and 2005, the Company had deferred
investment annuity policies that have segregated account assets
and liabilities, in the amount of $234.3 million and
$227.4 million, respectively. These policies are funded by
specific assets held in segregated custodian accounts for the
purposes of providing policy benefits and paying applicable
premiums, taxes and other charges as due. Because investment
decisions with respect to these segregated accounts are made by
the policyholders, these assets and liabilities are not
presented in the Companys financial statements. The assets
are held in individual custodian accounts, from which the
Company has received hold harmless agreements and
indemnification.
Note T
Segment Information
The Companys business segments for financial reporting
purposes include (i) the Insurance segment (which includes
the businesses of the Companys Self-Employed Agency
Division (SEA), the Life Insurance Division and
Other Insurance); (ii) Other Key Factors (which includes
investment income not allocated to the Insurance segment,
realized gains or losses on sale of investments, interest
expense on corporate debt, general expenses relating to
corporate operations, merger transaction expenses, variable
non-cash stock-based compensation and operations that do not
constitute reportable operating segments); and
(iii) Disposed Operations (which includes the
Companys former Star HRG and former Student Insurance
Division).
Allocations among segments 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, and fees and other income. Operations
that do not constitute reportable operating segments have been
combined with Other Key Factors. Depreciation expense and
capital expenditures are not considered material. Management
does not allocate income taxes to segments. Transactions between
reportable operating segments are accounted for under respective
agreements, which provide for such transactions generally at
cost.
F-72
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues from continuing operations and income from continuing
operations before federal income taxes for each of the years
ended December 31, 2006, 2005 and 2004 are set forth in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,462,088
|
|
|
$
|
1,525,968
|
|
|
$
|
1,496,199
|
|
Life Insurance Division
|
|
|
87,782
|
|
|
|
83,037
|
|
|
|
67,613
|
|
Other Insurance(1)
|
|
|
35,337
|
|
|
|
34,799
|
|
|
|
14,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
1,585,207
|
|
|
|
1,643,804
|
|
|
|
1,578,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors(2)
|
|
|
246,847
|
|
|
|
41,104
|
|
|
|
34,719
|
|
Intersegment Eliminations
|
|
|
(910
|
)
|
|
|
(706
|
)
|
|
|
(598
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues excluding disposed
operations
|
|
|
1,831,144
|
|
|
|
1,684,202
|
|
|
|
1,612,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
240,050
|
|
|
|
290,378
|
|
|
|
306,325
|
|
Star HRG
|
|
|
75,377
|
|
|
|
146,638
|
|
|
|
150,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Disposed Operations
|
|
|
315,427
|
|
|
|
437,016
|
|
|
|
456,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,146,571
|
|
|
$
|
2,121,218
|
|
|
$
|
2,069,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before federal income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
236,466
|
|
|
$
|
310,466
|
|
|
$
|
260,745
|
|
Life Insurance Division
|
|
|
5,264
|
|
|
|
7,053
|
|
|
|
4,690
|
|
Other Insurance(1)
|
|
|
5,488
|
|
|
|
4,658
|
|
|
|
1,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
247,218
|
|
|
|
322,177
|
|
|
|
266,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income on equity,
realized gains and losses, general corporate expenses and other
(including interest on corporate debt)
|
|
|
155,156
|
|
|
|
14,680
|
|
|
|
14,768
|
|
Merger transaction costs(3)
|
|
|
(48,019
|
)
|
|
|
(9,057
|
)
|
|
|
|
|
Variable stock-based compensation
|
|
|
(16,603
|
)
|
|
|
(7,214
|
)
|
|
|
(14,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Key Factors
|
|
|
90,534
|
|
|
|
(1,591
|
)
|
|
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income excluding
disposed operations
|
|
|
337,752
|
|
|
|
320,586
|
|
|
|
267,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
12,238
|
|
|
|
(8,870
|
)
|
|
|
(49,482
|
)
|
Star HRG Division
|
|
|
2,308
|
|
|
|
1,434
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Disposed Operations
|
|
|
14,546
|
|
|
|
(7,436
|
)
|
|
|
(46,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing
operations before federal income taxes
|
|
$
|
352,298
|
|
|
$
|
313,150
|
|
|
$
|
221,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-73
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Reflects results of a subsidiary (ZON Re USA
LLC) established in the third quarter of 2003 to
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. |
|
(2) |
|
The 2006 period includes the aggregate gain of
$201.7 million on the sales of the Companys former
Student Insurance Division and Star HRG Division |
|
(3) |
|
Includes the incremental costs associated with the acquisition
of the Company by a group of private equity investors. |
Assets by operating segment at December 31, 2006 and 2005
are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
930,856
|
|
|
$
|
842,273
|
|
Life Insurance Division
|
|
|
552,723
|
|
|
|
512,682
|
|
Other Insurance
|
|
|
20,419
|
|
|
|
24,064
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
1,503,998
|
|
|
|
1,379,019
|
|
Other Key Factors
|
|
|
943,360
|
|
|
|
765,565
|
|
|
|
|
|
|
|
|
|
|
Total assets excluding
|
|
|
|
|
|
|
|
|
Disposed Operations
|
|
|
2,447,358
|
|
|
|
2,144,584
|
|
|
|
|
|
|
|
|
|
|
Disposed Operations(1):
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
124,738
|
|
|
|
150,098
|
|
Star HRG Division
|
|
|
16,233
|
|
|
|
76,848
|
|
|
|
|
|
|
|
|
|
|
Total Disposed Operations
|
|
|
140,971
|
|
|
|
226,946
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,588,329
|
|
|
$
|
2,371,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Star HRG assets of $16.2 million at December 31,
2006 represent a reinsurance receivable associated with a
coinsurance agreement entered into with an insurance affiliate
of CIGNA Corporation. The Student Insurance Division assets of
$124.7 million at December 31, 2006 represent a
reinsurance receivable associated with a coinsurance agreement
entered into with an insurance affiliate of UnitedHealth Group.
See Note C. |
F-74
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note U
Earnings per Share
The following table sets forth the computation of basic and
diluted earnings per share for each of the years ended
December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share amounts)
|
|
|
Income available to common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common shareholders
|
|
$
|
216,568
|
|
|
$
|
202,970
|
|
|
$
|
145,881
|
|
Income from discontinued operations
|
|
|
21,170
|
|
|
|
531
|
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic earnings per
share
|
|
|
237,738
|
|
|
|
203,501
|
|
|
|
161,558
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
6% Convertible Note
interest(1)
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted earnings
per share
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding (thousands) basic earnings per share
|
|
|
34,952
|
|
|
|
46,119
|
|
|
|
46,131
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and other
(see Note R)
|
|
|
770
|
|
|
|
1,019
|
|
|
|
1,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding dilutive
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
35,722
|
|
|
|
47,138
|
|
|
|
47,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
6.19
|
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
Income from discontinued operations
|
|
|
0.61
|
|
|
|
0.01
|
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6.80
|
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
6.07
|
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
Income from discontinued operations
|
|
|
0.59
|
|
|
|
0.01
|
|
|
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6.66
|
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Applied to continuing operations |
Note V
Discontinued Operations
In years prior to 2004, the Company closed
and/or
disposed of assets and operations not otherwise related to its
core health and life insurance operations, including the
operations of the Companys former Academic Management
Services Corp. (AMS) subsidiary (which was engaged
in the student loan origination and funding business, student
loan servicing business, and tuition installment payment plan
business and which HealthMarkets sold in November 2003) and
the Companys former Special Risk Division.
F-75
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a summary of the Companys reported
results from discontinued operations for each of the years ended
December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Income (loss) by business unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
AMS
|
|
$
|
21,079
|
|
|
$
|
(461
|
)
|
|
$
|
9,872
|
|
Special Risk
|
|
|
91
|
|
|
|
992
|
|
|
|
5,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued
operations net of tax
|
|
$
|
21,170
|
|
|
$
|
531
|
|
|
$
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is a summary of the Companys net
liabilities from discontinued operations at December 31,
2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net liabilities by business unit:
|
|
|
|
|
|
|
|
|
AMS
|
|
$
|
1,485
|
|
|
$
|
3,623
|
|
Special Risk
|
|
|
2,309
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
Net liabilities of discontinued
operations
|
|
$
|
3,794
|
|
|
$
|
6,285
|
|
|
|
|
|
|
|
|
|
|
Academic
Management Services Corp.
The Companys reported results from discontinued operations
for the years ended December 31, 2006 and 2005 reflected a
partial release of the deferred gain recorded on the sale of
AMS remaining uninsured student loan assets in the first
quarter of 2004 and a decrease in the accrual in both 2005 and
2006, originally established in 2004 in connection with
litigation arising out of the Companys announcement that
it had uncovered collateral shortfalls in the type and amount of
collateral supporting two of the securitized student loan
financing facilities of AMS.
The federal income tax benefit with respect to discontinued
operations for the year ended December 31, 2006 of
$19.6 million exceeds the anticipated 35% tax expense of
$537,000 due to the release of certain tax reserves and
valuation allowances on deferred tax assets related to capital
loss carryovers and other capital items of $20.1 million
that are recoverable as a result of the sale of Star HRG at a
gain. A significant portion of the released tax allowances and
reserves was originally established during 2003 primarily
because management did not anticipate realizing before its
expiration the tax benefits of the capital loss carryover from
the sale of its former student finance subsidiary.
The federal income tax expense for the year ended
December 31, 2005 for the AMS discontinued operations
reflected an increase in the valuation allowance on deferred tax
assets related to an increase in the capital loss carryover in
excess of the amount previously estimated that is likely to
expire before it can be utilized to offset future capital gains.
Results from discontinued operations for the full year 2004
reflected a pre-tax gain recorded in the first quarter of 2004
in the amount of $7.7 million generated from the sale of
the remaining uninsured student loan assets formerly held by AMS
(which the Company disposed of in November 2003), a tax benefit
associated with the reduction of a tax accrual and the release
of a portion of the valuation allowance on the capital loss
carryover due to the realization of capital gains during 2004.
These favorable factors were offset in part by the recording in
the second quarter of 2004 of a loss accrual with respect to
multiple lawsuits that were filed arising out of
HealthMarkets announcement in July 2003 of a shortfall in
the type and amount of collateral supporting
F-76
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
securitized student loan financing facilities of the
Companys former AMS subsidiary. The sale of the uninsured
student loans generated gross cash proceeds in the amount of
approximately $25.0 million.
Set forth below is a summary of the operating results of AMS as
reflected in the consolidated financial statements of the
Company for each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004(1)
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
$
|
830
|
|
|
$
|
1,417
|
|
|
$
|
8,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
830
|
|
|
|
1,417
|
|
|
|
8,820
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
(705
|
)
|
|
|
(201
|
)
|
|
|
3,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(705
|
)
|
|
|
(201
|
)
|
|
|
3,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before
income taxes
|
|
|
1,535
|
|
|
|
1,618
|
|
|
|
5,662
|
|
Federal income tax expense
(benefit)
|
|
|
(19,544
|
)
|
|
|
2,079
|
|
|
|
(4,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from AMS
discontinued operations
|
|
$
|
21,079
|
|
|
$
|
(461
|
)
|
|
$
|
9,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects sale of uninsured loan portfolio in March 2004 and
recording of loss accrual related to litigation. |
Special
Risk Division
In December 2001, the Company determined to exit the businesses
of its Special Risk Division by sale, abandonment or wind-down
and the Company designated and classified its Special Risk
Division as a discontinued operation for financial reporting
purposes. The Companys Special Risk Division formerly
specialized in certain niche health-related products (including
stop loss, marine crew accident, organ transplant
and international travel accident products), various insurance
intermediary services and certain managed care services.
Special Risk results for the year ended December 31, 2006
reflected the minimal remaining residual activity. The Company
will continue the wind-down of its former Special Risk Division.
Set forth below is a summary of the operating results of the
Special Risk Division for each of the years ended
December 31, 2006, 2005 and 2004, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
17
|
|
|
$
|
|
|
|
$
|
(3,954
|
)
|
Investment and other income
|
|
|
143
|
|
|
|
540
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
160
|
|
|
|
540
|
|
|
|
(2,447
|
)
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement
expenses
|
|
|
56
|
|
|
|
(182
|
)
|
|
|
(13,788
|
)
|
Underwriting, acquisition and
insurance expenses
|
|
|
(36
|
)
|
|
|
(804
|
)
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
20
|
|
|
|
(986
|
)
|
|
|
(11,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before
income taxes
|
|
|
140
|
|
|
|
1,526
|
|
|
|
8,931
|
|
Federal income tax expense
|
|
|
49
|
|
|
|
534
|
|
|
|
3,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Special Risk
discontinued operations
|
|
$
|
91
|
|
|
$
|
992
|
|
|
$
|
5,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-77
HEALTHMARKETS,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note W
Supplemental Financial Statement Data
Set forth below is certain supplemental information concerning
underwriting, policy acquisition costs and insurance expenses
for the years ended December 31, 2006, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Amortization of deferred policy
acquisition costs
|
|
$
|
172,112
|
|
|
$
|
82,567
|
|
|
$
|
73,532
|
|
Commissions
|
|
|
28,823
|
|
|
|
136,810
|
|
|
|
138,949
|
|
Administrative expenses
|
|
|
333,943
|
|
|
|
348,778
|
|
|
|
362,626
|
|
Premium taxes
|
|
|
43,760
|
|
|
|
49,646
|
|
|
|
49,333
|
|
Intangible asset amortization
|
|
|
2,525
|
|
|
|
3,731
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
581,163
|
|
|
$
|
621,532
|
|
|
$
|
625,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs and
commissions for the 2006 year reflect the change in
accounting policy with respect to the amortization of a portion
of deferred acquisition costs associated with commissions paid
to agents. See Note A.
Note X
Supplemental Non-cash Disclosure
Supplemental
disclosure of non-cash operating activities:
During the 2006, 2005 and 2004, the Company issued shares to the
Agent Plans with a value of $17.5 million,
$21.2 million and $10.6 million, respectively.
Supplemental
disclosure of non-cash investing activities:
On July 11, 2006, the Company received a promissory note in
the amount of $150.8 million as consideration for its Star
HRG Division assets. On August 16, 2006, the Company
assigned the $150.8 million promissory note to Grapevine
Finance LLC. See Note L.
On December 1, 2006, the Company received a promissory note
in the principal amount of $94.8 million as consideration
for the sale of the Student Insurance Division assets.
F-78
SCHEDULE II
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
HEALTHMARKETS, INC. (HOLDING COMPANY)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Investments in and advances to
subsidiaries*
|
|
$
|
491,209
|
|
|
$
|
734,802
|
|
Investments in bonds, stocks and
other
|
|
|
|
|
|
|
8,303
|
|
Cash and cash equivalents
|
|
|
48,578
|
|
|
|
151,423
|
|
Goodwill
|
|
|
|
|
|
|
16,352
|
|
Refundable income taxes
|
|
|
27,276
|
|
|
|
13,253
|
|
Deferred income tax
|
|
|
22,567
|
|
|
|
14,332
|
|
Other
|
|
|
1,056
|
|
|
|
2,958
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
590,686
|
|
|
$
|
941,423
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accrued expenses and other
liabilities
|
|
$
|
16,533
|
|
|
$
|
12,362
|
|
Agent plan liability
|
|
|
45,974
|
|
|
|
36,225
|
|
Long-term debt
|
|
|
|
|
|
|
15,470
|
|
Net liabilities of discontinued
operations
|
|
|
3,794
|
|
|
|
6,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,301
|
|
|
|
70,342
|
|
|
STOCKHOLDERS
EQUITY
|
Common stock
|
|
|
300
|
|
|
|
476
|
|
Additional paid-in capital
|
|
|
12,529
|
|
|
|
212,331
|
|
Accumulated other comprehensive
income
|
|
|
(12,552
|
)
|
|
|
(7,823
|
)
|
Retained earnings
|
|
|
527,978
|
|
|
|
697,243
|
|
Treasury stock
|
|
|
(3,870
|
)
|
|
|
(31,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
524,385
|
|
|
|
871,081
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
590,686
|
|
|
$
|
941,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
HealthMarkets, Inc. and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-79
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
HEALTHMARKETS, INC. (HOLDING COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from continuing
operations*
|
|
$
|
372,428
|
|
|
$
|
171,876
|
|
|
$
|
30,690
|
|
Interest and other income
(includes amounts received from related parties of $0, $0 and $7
in 2006, 2005 and 2004, respectively)
|
|
|
3,003
|
|
|
|
3,892
|
|
|
|
3,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,431
|
|
|
|
175,768
|
|
|
|
34,127
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses (includes amounts paid to related parties of $19,339,
$565 and $462 in 2006, 2005 and 2004, respectively)
|
|
|
98,998
|
|
|
|
32,806
|
|
|
|
17,017
|
|
Variable stock compensation expense
|
|
|
16,603
|
|
|
|
7,214
|
|
|
|
14,307
|
|
Interest expense
|
|
|
332
|
|
|
|
1,148
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,933
|
|
|
|
41,168
|
|
|
|
32,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in
undistributed earnings of subsidiaries and federal income tax
expense
|
|
|
259,498
|
|
|
|
134,600
|
|
|
|
1,720
|
|
Federal income tax benefit
|
|
|
42,075
|
|
|
|
12,087
|
|
|
|
13,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in
undistributed earnings of subsidiaries
|
|
|
301,573
|
|
|
|
146,687
|
|
|
|
15,271
|
|
(Deficit) equity in undistributed
earnings of continuing operations*
|
|
|
(85,005
|
)
|
|
|
56,283
|
|
|
|
130,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
216,568
|
|
|
|
202,970
|
|
|
|
145,881
|
|
Dividends from discontinued
operations*
|
|
|
90
|
|
|
|
72
|
|
|
|
25,230
|
|
Equity in undistributed earnings
(losses) from discontinued operations*
|
|
|
21,080
|
|
|
|
459
|
|
|
|
(9,553
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
21,170
|
|
|
|
531
|
|
|
|
15,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
HealthMarkets, Inc. and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-80
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
HEALTHMARKETS, INC. (HOLDING COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
237,738
|
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
Adjustments to reconcile net
income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed loss of
subsidiaries of discontinued operations*
|
|
|
(21,080
|
)
|
|
|
(459
|
)
|
|
|
9,553
|
|
Deficit (equity) in undistributed
earnings of continuing operations*
|
|
|
85,005
|
|
|
|
(56,283
|
)
|
|
|
(130,610
|
)
|
Gains on sale of investments
|
|
|
|
|
|
|
|
|
|
|
(2,169
|
)
|
Change in other receivables
|
|
|
2,771
|
|
|
|
(880
|
)
|
|
|
5,574
|
|
Variable stock compensation
|
|
|
16,603
|
|
|
|
7,214
|
|
|
|
14,307
|
|
Change in accrued expenses and
other liabilities
|
|
|
14,827
|
|
|
|
14,469
|
|
|
|
19,811
|
|
Deferred income tax (benefit)
change
|
|
|
(7,352
|
)
|
|
|
1,811
|
|
|
|
(15,644
|
)
|
Change in federal income tax
payable
|
|
|
(14,023
|
)
|
|
|
(11,138
|
)
|
|
|
(19,445
|
)
|
Other items, net
|
|
|
931
|
|
|
|
1,780
|
|
|
|
660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by continuing
operations
|
|
|
315,420
|
|
|
|
160,015
|
|
|
|
43,595
|
|
Cash Provided by (Used in)
discontinued operations
|
|
|
(1,390
|
)
|
|
|
831
|
|
|
|
2,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Provided by Operating
Activities
|
|
|
314,030
|
|
|
|
160,846
|
|
|
|
46,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of securities available
for sale
|
|
|
|
|
|
|
|
|
|
|
(10,490
|
)
|
Sales, maturities, calls and
redemptions of securities available for sale
|
|
|
70
|
|
|
|
2,190
|
|
|
|
327
|
|
(Increase) decrease in investments
in and advances to subsidiaries
|
|
|
204,608
|
|
|
|
(8,321
|
)
|
|
|
11,717
|
|
Increase in other investments
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Provided by (Used in)
Investing Activities
|
|
|
204,678
|
|
|
|
(6,131
|
)
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
|
|
|
|
(18,951
|
)
|
Proceeds of notes payable
|
|
|
|
|
|
|
|
|
|
|
14,570
|
|
Exercise of stock options
|
|
|
337
|
|
|
|
2,582
|
|
|
|
5,552
|
|
Tax benefits from share-based
compensation
|
|
|
1,390
|
|
|
|
1,861
|
|
|
|
1,972
|
|
Purchase of treasury stock
|
|
|
(1,620,733
|
)
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
Sale of shares to agents
|
|
|
9,654
|
|
|
|
|
|
|
|
|
|
Contribution from private equity
investors
|
|
|
985,000
|
|
|
|
|
|
|
|
|
|
Payments of dividends to
shareholders
|
|
|
|
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
Other changes in equity
|
|
|
2,799
|
|
|
|
756
|
|
|
|
(1,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Used in Financing
Activities
|
|
|
(621,553
|
)
|
|
|
(42,865
|
)
|
|
|
(45,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash
|
|
|
(102,845
|
)
|
|
|
111,850
|
|
|
|
1,733
|
|
Cash and Cash Equivalents at
beginning of period
|
|
|
151,423
|
|
|
|
39,573
|
|
|
|
37,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end
of period
|
|
$
|
48,578
|
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
HealthMarkets, Inc. and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-81
SCHEDULE III
HEALTHMARKETS,
INC.
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. A
|
|
Col. B
|
|
|
Col. C
|
|
|
Col. D
|
|
|
Col. E
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Losses, Claims,
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Policyholder
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Funds
|
|
|
|
(In thousands)
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
101,425
|
|
|
$
|
521,041
|
|
|
$
|
71,679
|
|
|
$
|
4,204
|
|
Life Insurance Division
|
|
|
95,839
|
|
|
|
372,980
|
|
|
|
6,859
|
|
|
|
7,632
|
|
Other Insurance
|
|
|
493
|
|
|
|
14,289
|
|
|
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding disposed operations
|
|
|
197,757
|
|
|
|
908,310
|
|
|
|
79,744
|
|
|
|
11,836
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
|
|
|
|
49,707
|
|
|
|
72,014
|
|
|
|
|
|
Star HRG Division
|
|
|
|
|
|
|
12,830
|
|
|
|
|
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,757
|
|
|
$
|
970,847
|
|
|
$
|
151,758
|
|
|
$
|
12,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
44,979
|
|
|
$
|
537,293
|
|
|
$
|
75,221
|
|
|
$
|
4,999
|
|
Life Insurance Division
|
|
|
78,175
|
|
|
|
369,961
|
|
|
|
7,223
|
|
|
|
7,882
|
|
Other Insurance
|
|
|
781
|
|
|
|
16,247
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding disposed operations
|
|
|
123,935
|
|
|
|
923,501
|
|
|
|
85,060
|
|
|
|
12,881
|
|
Disposed Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
7,185
|
|
|
|
65,794
|
|
|
|
70,225
|
|
|
|
|
|
Star HRG Division
|
|
|
|
|
|
|
16,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,120
|
|
|
$
|
1,006,098
|
|
|
$
|
155,285
|
|
|
$
|
12,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of Independent Registered Public Accounting Firm.
F-82
SCHEDULE III
HEALTHMARKETS,
INC.
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. F
|
|
|
Col. G
|
|
|
Col. H
|
|
|
Col. I
|
|
|
Col. J
|
|
|
Col. K
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
|
|
|
of Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, and
|
|
|
Policy
|
|
|
Other
|
|
|
|
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Revenue
|
|
|
Income*
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses*(1)
|
|
|
Written
|
|
|
|
(In thousands)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,330,298
|
|
|
$
|
31,809
|
|
|
$
|
721,689
|
|
|
$
|
143,547
|
|
|
$
|
260,404
|
|
|
|
|
|
Life Insurance Division
|
|
|
65,716
|
|
|
|
20,222
|
|
|
|
44,459
|
|
|
|
20,599
|
|
|
|
15,616
|
|
|
|
|
|
Other Insurance
|
|
|
33,873
|
|
|
|
1,356
|
|
|
|
18,748
|
|
|
|
780
|
|
|
|
10,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding disposed operations
|
|
|
1,429,887
|
|
|
|
53,387
|
|
|
|
784,896
|
|
|
|
164,926
|
|
|
|
286,233
|
|
|
|
|
|
Disposed operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
233,280
|
|
|
|
4,882
|
|
|
|
165,334
|
|
|
|
7,186
|
|
|
|
53,404
|
|
|
|
|
|
Star HRG Division
|
|
|
74,079
|
|
|
|
369
|
|
|
|
46,387
|
|
|
|
|
|
|
|
25,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,737,246
|
|
|
$
|
58,638
|
|
|
$
|
996,617
|
|
|
$
|
172,112
|
|
|
$
|
365,390
|
|
|
$
|
1,754,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,394,644
|
|
|
$
|
32,725
|
|
|
$
|
718,502
|
|
|
$
|
53,304
|
|
|
$
|
345,097
|
|
|
|
|
|
Life Insurance Division
|
|
|
61,936
|
|
|
|
20,349
|
|
|
|
39,684
|
|
|
|
18,671
|
|
|
|
16,877
|
|
|
|
|
|
Other Insurance
|
|
|
33,856
|
|
|
|
784
|
|
|
|
19,509
|
|
|
|
87
|
|
|
|
10,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding disposed operations
|
|
|
1,490,436
|
|
|
|
53,858
|
|
|
|
777,695
|
|
|
|
72,062
|
|
|
|
372,360
|
|
|
|
|
|
Disposed operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
282,486
|
|
|
|
6,121
|
|
|
|
222,306
|
|
|
|
10,505
|
|
|
|
64,666
|
|
|
|
|
|
Star HRG Division
|
|
|
144,612
|
|
|
|
703
|
|
|
|
92,135
|
|
|
|
|
|
|
|
51,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,917,534
|
|
|
$
|
60,682
|
|
|
$
|
1,092,136
|
|
|
$
|
82,567
|
|
|
$
|
488,772
|
|
|
$
|
1,895,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,355,328
|
|
|
$
|
33,640
|
|
|
$
|
736,678
|
|
|
$
|
52,655
|
|
|
$
|
338,890
|
|
|
|
|
|
Life Insurance Division
|
|
|
46,503
|
|
|
|
20,425
|
|
|
|
33,613
|
|
|
|
13,906
|
|
|
|
14,719
|
|
|
|
|
|
Other Insurance
|
|
|
14,127
|
|
|
|
114
|
|
|
|
6,158
|
|
|
|
|
|
|
|
6,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding disposed operations
|
|
|
1,415,958
|
|
|
|
54,179
|
|
|
|
776,449
|
|
|
|
66,561
|
|
|
|
360,277
|
|
|
|
|
|
Disposed operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Student Insurance Division
|
|
|
297,036
|
|
|
|
6,089
|
|
|
|
265,698
|
|
|
|
6,971
|
|
|
|
79,938
|
|
|
|
|
|
Star HRG Division
|
|
|
145,749
|
|
|
|
817
|
|
|
|
92,754
|
|
|
|
|
|
|
|
50,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,858,743
|
|
|
$
|
61,085
|
|
|
$
|
1,134,901
|
|
|
$
|
73,532
|
|
|
$
|
490,707
|
|
|
$
|
1,882,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Allocations of Net Investment Income and Other Operating
Expenses are based on a number of assumptions and estimates, and
the results would change if different methods were applied. |
|
(1) |
|
Other operating expenses include underwriting, policy
acquisition costs, and insurance expenses and other income and
expenses allocable to the respective division. |
See report of Independent Registered Public Accounting Firm.
F-83
SCHEDULE IV
HEALTHMARKETS,
INC.
AND SUBSIDIARIES
REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Ceded
|
|
|
Assumed
|
|
|
Net Amount
|
|
|
to Net
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
9,058,333
|
|
|
$
|
2,151,355
|
|
|
$
|
52,765
|
|
|
$
|
6,959,743
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
73,557
|
|
|
$
|
9,708
|
|
|
$
|
1,826
|
|
|
$
|
65,675
|
|
|
|
2.8
|
%
|
Health insurance
|
|
|
1,746,796
|
|
|
|
111,139
|
|
|
|
35,914
|
|
|
|
1,671,571
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,820,353
|
|
|
$
|
120,847
|
|
|
$
|
37,740
|
|
|
$
|
1,737,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
8,480,598
|
|
|
$
|
2,119,688
|
|
|
$
|
94,549
|
|
|
$
|
6,455,459
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
69,581
|
|
|
$
|
9,967
|
|
|
$
|
1,951
|
|
|
$
|
61,565
|
|
|
|
3.2
|
%
|
Health insurance
|
|
|
1,822,938
|
|
|
|
4,090
|
|
|
|
37,121
|
|
|
|
1,855,969
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,892,519
|
|
|
$
|
14,057
|
|
|
$
|
39,072
|
|
|
$
|
1,917,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
$
|
7,194,680
|
|
|
$
|
1,757,889
|
|
|
$
|
111,488
|
|
|
$
|
5,548,279
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
51,713
|
|
|
$
|
9,306
|
|
|
$
|
3,444
|
|
|
$
|
45,851
|
|
|
|
7.5
|
%
|
Health insurance
|
|
|
1,789,025
|
|
|
|
4,053
|
|
|
|
27,920
|
|
|
|
1,812,892
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,840,738
|
|
|
$
|
13,359
|
|
|
$
|
31,364
|
|
|
$
|
1,858,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of Independent Registered Public Accounting Firm.
F-84
SCHEDULE V
HEALTHMARKETS,
INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Recoveries/
|
|
|
Deductions/
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
in
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
Carrying
|
|
|
Charged
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Value
|
|
|
Off
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
3,710
|
|
|
$
|
2,896
|
|
|
$
|
|
|
|
$
|
(2,442
|
)
|
|
$
|
4,164
|
|
Other receivables
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
(3,031
|
)
|
|
|
668
|
|
Mortgage loans
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
|
|
33
|
|
Student loans
|
|
|
2,722
|
|
|
|
2,186
|
|
|
|
|
|
|
|
(1,652
|
)
|
|
|
3,256
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
2,967
|
|
|
$
|
3,194
|
|
|
$
|
|
|
|
$
|
(2,451
|
)
|
|
$
|
3,710
|
|
Other receivables
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
Mortgage loans
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
55
|
|
Student loans
|
|
|
3,608
|
|
|
|
696
|
|
|
|
|
|
|
|
(1,582
|
)
|
|
|
2,722
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
3,143
|
|
|
$
|
2,759
|
|
|
$
|
|
|
|
$
|
(2,935
|
)
|
|
$
|
2,967
|
|
Other receivables
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
Mortgage
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Student loans
|
|
|
1,676
|
|
|
|
3,163
|
|
|
|
|
|
|
|
(1,231
|
)
|
|
|
3,608
|
|
Real estate
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
(2,434
|
)
|
|
|
|
|
See report of Independent Registered Public Accounting Firm.
F-85
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
2
|
.1
|
|
|
|
Plan of Reorganization of United
Group Insurance Company, as subsidiary of United Group
Companies, Inc. and Plan and Agreement of Merger of United Group
Companies, Inc. into United Insurance Companies, Inc., filed as
Exhibit 2-1
to the Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
2
|
.2
|
|
|
|
Agreement and Plan of Merger,
dated as of September 15, 2005, by and among UICI and
Premium Finance LLC, Mulberry Finance Co., Inc., DLJMB IV First
Merger LLC, Premium Acquisition, Inc., Mulberry Acquisition,
Inc., and DLJMB IV First Merger Co. Acquisition Inc., filed as
Exhibit 2.1 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
3
|
.1
|
|
|
|
Certificate of Incorporation of
UICI, filed as Exhibit 1 to Registration Statement on
Form 8-A
filed on April 5, 2006, File
No. 000-14320,
and incorporated by reference herein.
|
|
3
|
.2
|
|
|
|
By-Laws of UICI, filed as
Exhibit 2 to Registration Statement on
Form 8-A
filed on April 5, 2006, File
No. 000-14320,
and incorporated by reference herein.
|
|
3
|
.3
|
|
|
|
Certificate of Amendment to
Certificate of Incorporation of UICI, filed as Exhibit 3.1
to the Current Report on
Form 8-K
dated April 14, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.1
|
|
|
|
Amended and Restated
Trust Agreement, dated as of April 5, 2006, among
HealthMarkets, LLC, La Salle National Bank National
Association, Christiana Bank and Trust Company, and certain
administrative trustees named therein (HealthMarkets Capital
Trust I), filed as Exhibit 4.1 to the Current Report
on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.2
|
|
|
|
Amended and Restated
Trust Agreement, dated as of April 5, 2006, among
HealthMarkets, LLC, La Salle National Bank National
Association, Christiana Bank and Trust Company, and certain
administrative trustees named therein (HealthMarkets Capital
Trust II), filed as Exhibit 4.1 to the Current Report
on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.3
|
|
|
|
Junior Subordinated Indenture,
dated as of April 5, 2006, between HealthMarkets, LLC and
La Salle National Bank National Association (HealthMarkets
Capital Trust I), filed as Exhibit 4.3 to the Current
Report on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.4
|
|
|
|
Junior Subordinated Indenture,
dated as of April 5, 2006, between HealthMarkets, LLC and
La Salle National Bank National Association (HealthMarkets
Capital Trust II), filed as Exhibit 4.4 to the Current
Report on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.5
|
|
|
|
Guarantee Agreement, dated as of
April 5, 2006, between HealthMarkets, LLC and La Salle
National Bank National Association (HealthMarkets Capital
Trust I), filed as Exhibit 4.5 to the Current Report
on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.6
|
|
|
|
Guarantee Agreement, dated as of
April 5, 2006 between HealthMarkets, LLC and La Salle
National Bank National Association (HealthMarkets Capital
Trust II), filed as Exhibit 4.6 to the Current Report
on Form 8K dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
4
|
.7
|
|
|
|
Specimen Stock Certificate of
Class A-1
Common Stock, filed as Exhibit 4.2 to the to Post-Effective
Amendment No. 1 to Registration Statement on
Form S-8
filed on April 6, 2006, File
No. 033-77690,
and incorporated by reference herein.
|
|
10
|
.1
|
|
|
|
Agreement for acquisition of
capital stock of Mark Twain Life Insurance Corporation by
Mr. Ronald L. Jensen, filed as
Exhibit 10-4
to the Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
10
|
.2
|
|
|
|
Assignment Agreement among
Mr. Ronald L. Jensen, the Company and Onward and Upward,
Inc. dated February 12, 1986 filed as
Exhibit 10-4(A)
to Amendment No. 1 to Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
February 13, 1986 and incorporated by reference herein.
|
|
10
|
.3
|
|
|
|
Agreement for acquisition of
capital stock of Mid-West National Life Insurance Company of
Tennessee by the Company filed as Exhibit 2 to the Report
on
Form 8-K
of the Company, File
No. 0-14320,
dated August 15, 1986 and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.4
|
|
|
|
Stock Purchase Agreement, dated
July 1, 1986, among the Company, Charles E. Stuart and
Stuart Holding Company, as amended July 7, 1986, filed as
Exhibit 11(c)(1) to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.5
|
|
|
|
Acquisition Agreement, dated
July 7, 1986 between Associated Companies, Inc. and the
Company, together with exhibits thereto, filed as Exhibit(c)(2)
to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.6
|
|
|
|
Offer to Purchase, filed as
Exhibit(a)(1) to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.7
|
|
|
|
Agreement for acquisition of
capital stock of Life Insurance Company of Kansas, filed as
Exhibit 10.6 to the 1986 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 27, 1987 and incorporated by reference herein.
|
|
10
|
.8
|
|
|
|
Treaty of Assumption and Bulk
Reinsurance Agreement for acquisition of certain assets and
liabilities of Keystone Life Insurance Company, filed as
Exhibit 10.10 to the 1987 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
|
|
10
|
.9
|
|
|
|
Acquisition and Sale-Purchase
Agreements for the acquisition of Orange State Life and Health
Insurance Company and certain other assets, filed as
Exhibit 10.11 to the 1987 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
|
|
10
|
.10*
|
|
|
|
United Insurance Companies, Inc.
1987 Stock Option Plan, included with the 1988 Proxy Statement
filed with the Securities and Exchange Commission on
April 25, 1988 and incorporated by reference herein, filed
as Exhibit 10.12 to the 1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.11*
|
|
|
|
Amendment to the United Insurance
Companies, Inc. 1987 Stock Option Plan, filed as
Exhibit 10.13 to the 1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.12*
|
|
|
|
UICI Restated and Amended 1987
Stock Option Plan as amended and restated March 16, 1999
filed as Exhibit 10.1 to
Form 10-Q
dated March 31, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.13
|
|
|
|
Amendment to Stock Purchase
Agreement between American Capital Insurance Company and United
Insurance Companies, Inc., filed as Exhibit 10.15 to the
1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.14
|
|
|
|
Agreement of Substitution and
Assumption Reinsurance dated as of January 1, 1991 by and
among Farm and Home Life Insurance Company, the Arizona Life and
Disability Insurance Guaranty Fund and United Group Insurance
Company, as modified by a Modification Agreement dated
August 26, 1991, together with schedules and exhibits
thereto, filed as Exhibit 2 to Schedule 13D, filed
with the Securities and Exchange Commission on September 3,
1991 and incorporated by reference herein.
|
|
10
|
.15
|
|
|
|
Stock Purchase Agreement dated as
of August 26, 1991 by and among Farm and Home Life
Insurance Company, First United, Inc. and The MEGA Life and
Health Insurance Company, filed as Exhibit 3 to
Schedule 13D, filed with the Securities and Exchange
Commission on September 3, 1991 and incorporated by
reference herein.
|
|
10
|
.16
|
|
|
|
Stock Purchase Agreement dated as
of August 26, 1991 by and among Farm and Home Life
Insurance Company, The Chesapeake Life Insurance Company and
Mid-West National Life Insurance Company of Tennessee, filed as
Exhibit 4 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
September 3, 1991 and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.17
|
|
|
|
Second Agreement of Modification
to Agreement of Substitution and Assumption Reinsurance dated as
of November 15, 1991 among Farm and Home Life Insurance
Company, United Group Insurance Company, and the Arizona Life
and Disability Insurance Guaranty Fund, filed as Exhibit 1
to Amendment No. 1 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein. This
agreement refers to a Modification Agreement dated
September 12, 1991. The preliminary agreement included in
the initial statement was originally dated August 26, 1991.
|
|
10
|
.18
|
|
|
|
Addendum to Agreement of
Substitution and Assumption Reinsurance dated as of
November 22, 1991 among United Group Insurance Company,
Farm and Home Life Insurance Company, and the Arizona Life and
Disability Insurance Guaranty Fund, filed as Exhibit 2 to
Amendment No. 1 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein.
|
|
10
|
.19
|
|
|
|
Modification Agreement dated
November 15, 1991 between First United, Inc., Underwriters
National Assurance Company, and Farm and Home Life Insurance
Company, The MEGA Life and Health Insurance Company, and the
Insurance Commissioner of the State of Indiana, and filed as
Exhibit 3 to Amendment No. 1 to Schedule 13D,
File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein.
|
|
10
|
.20
|
|
|
|
Agreement of Reinsurance and
Assumption dated December 14, 1992 by and among Mutual
Security Life Insurance Company, in Liquidation, National
Organization of Life and Health Insurance Guaranty Associations,
and The MEGA Life and Health Insurance Company, and filed as
Exhibit 2 to the Companys Report on
Form 8-K
dated March 29, 1993, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.21
|
|
|
|
Acquisition Agreement dated
January 15, 1993 by and between United Insurance Companies,
Inc. and Southern Educators Life Insurance Company, and filed as
Exhibit 2 to the Companys Report on
Form 8-K
dated March 29, 1993, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.22
|
|
|
|
Stock Exchange Agreement effective
January 1, 1993 by and between Onward and Upward, Inc. and
United Insurance Companies, Inc. and filed as Exhibit 2 to
the Companys Report on
Form 8-K
dated March 29, 1993, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.23
|
|
|
|
Stock Purchase Agreement by and
among United Insurance Companies, Inc. and United Group
Insurance Company and Landmark Land Company of Oklahoma, Inc.
dated January 6, 1994, and filed as Exhibit 10.27 to
Form 10-Q
dated March 31, 1994, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.24
|
|
|
|
Asset Purchase Agreement between
UICI Companies and PFL Life Insurance Company, Bankers United
Life Assurance Company, Life Investors Insurance Company of
America and Monumental Life Insurance Company and Money
Services, Inc. effective April 1, 1996, as filed as
Exhibit 10.2 to the Companys Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320)
and incorporated by reference herein.
|
|
10
|
.25
|
|
|
|
General Agents Agreement
between Mid-West National Life Insurance Company of Tennessee
and United Group Association, Inc. effective April 1, 1996,
and filed as Exhibit 10.3 to the Companys Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.26
|
|
|
|
General Agents Agreement
between The MEGA Life and Health Insurance Company and United
Group Association, Inc. Effective April 1, 1996, and filed
as Exhibit 10.4 to the Companys Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320)
and incorporated by reference herein.
|
|
10
|
.27
|
|
|
|
Agreement between United Group
Association, Inc. and Cornerstone Marketing of America effective
April 1, 1996, and filed as Exhibit 10.5 to the
Companys Current Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320)
and incorporated by reference herein.
|
|
10
|
.28
|
|
|
|
Stock Purchase Agreement dated,
July 27, 2000, between UICI and C&J Investments, LLC
filed as Exhibit 10.44 to
Form 10-Q
dated June 30, 2000, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.29*
|
|
|
|
Management Agreement, dated
December 31, 2000 between UICI, The Mega Life and Health
Insurance Company and William J. Gedwed, filed as
Exhibit 10.45 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.30*
|
|
|
|
UICI 2000 Restricted Stock Plan
effective January 1, 2000, filed as Exhibit 10.46 to
the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.31*
|
|
|
|
UICI 2001 Restricted Stock Plan
effective January 1, 2001, filed as Exhibit 10.47 to
the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.32
|
|
|
|
Information Technology Services
Agreement by and between UICI and Insurdata Incorporated (now
HealthAxis, Inc.), dated January 3, 2000, filed as
Exhibit 10.50 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.33
|
|
|
|
Administrative Service Agreement
dated July 27,2000 between The MEGA Life and Health
Insurance Company and National Motor Club of America, Inc. filed
as Exhibit 10.52 to the Companys 2000 Annual Report
on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.34
|
|
|
|
Stock Purchase Agreement dated
May 12, 2000 between UICI and The Mega Life and Health
Insurance Company with respect to all of the outstanding capital
stock of The Chesapeake Life Insurance Company, filed as
Exhibit 10.53 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.35
|
|
|
|
Sublease Agreement dated
July 27, 2000 between The Mega Life and Health Insurance
and National Motor Club of America, Inc., filed as
Exhibit 10.62 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.36
|
|
|
|
Software License Agreement dated
January 30, 2001 between UICI and HealthAxis.com, filed as
Exhibit 10.63 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.37
|
|
|
|
General and First Supplemental
Indenture between CLFD-I, Inc. and Zions First National Bank, as
Trustee relating to the Student Loan Asset Backed Notes
dated as of April 1, 2001, filed as Exhibit 10.66 to
the Companys 2001 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 22, 2002 and incorporated by reference herein.
|
|
10
|
.38
|
|
|
|
Second Supplemental Indenture,
dated as of April 1, 2002, between CFLD-I, Inc. and Zions
First National Bank, as Trustee, relating to $50,000,000 CFLD-I,
Inc. Student Loan Asset Backed Notes, Senior
Series 2002A-1
(Auction Rate Certificates) filed as Exhibit 10.69 to the
Form 10-Q
dated June 30, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.40
|
|
|
|
Third Supplemental Indenture,
dated as of April 1, 2002, between CFLD-I, Inc. and Zions
First National Bank, as Trustee, amending General Indenture,
dated as of April 1, 2001, relating to CFLD-I, Inc. Student
Loan Asset Backed Notes filed as Exhibit 10.70 to the
Form 10-Q
dated June 30, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.41*
|
|
|
|
Stock purchase agreement between
Ronald L. Jensen and Gregory T. Mutz filed as Exhibit 10.80
to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.42*
|
|
|
|
Stock purchase agreement between
UICI and Gregory T. Mutz filed as Exhibit 10.81 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.43
|
|
|
|
Stock Purchase Agreement, dated
October 29, 2003, between UICI and SLM Corporation,
contemplating the sale by UICI, and the purchase by SLM
Corporation, of all issued and outstanding shares of Academic
Management Services Corp. filed as Exhibit 10.85 to the
Current Report on
Form 8-K
dated November 18, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.44
|
|
|
|
Amendment to Stock Purchase
Agreement, dated November 18, 2003, between UICI and SLM
Corporation filed as Exhibit 10.86 to the Current Report on
Form 8-K
dated November 18, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.45*
|
|
|
|
Agreement, dated as of
February 11, 2004, between the Company and Gregory T. Mutz
filed as Exhibit 10.87 to the
Form 10-K
dated December 31, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.46
|
|
|
|
Amended and Restated
Trust Agreement among UICI, JP Morgan Chase Bank, Chase
Manhattan Bank USA, National Association, and The Administrative
Trustees dated April 29, 2004 and incorporated by reference
herein.
|
|
10
|
.47*
|
|
|
|
Form of Grant Letter Pursuant to
1987 UICI Non-Qualified Stock Option Agreement and incorporated
by reference herein.
|
|
10
|
.48*
|
|
|
|
Form of Stock Grant under
UICIs 2000 and 2001 Restricted Stock Agreement and
incorporated by reference herein.
|
|
10
|
.49
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The MEGA Life and Health Insurance
Company and the National Association for the Self-Employed filed
as exhibit 10.91 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.50
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The MEGA Life and Health Insurance
Company and Americans for Financial Security, Inc. filed as
exhibit 10.92 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.51
|
|
|
|
Amended and Restated Vendor
Agreement, dated as June 1, 2005, between Mid-West National
Life Insurance Company of Tennessee and Alliance for Affordable
Services filed as exhibit 10.93 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.52
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The Chesapeake Life Insurance
Company and Alliance for Affordable Services filed as
exhibit 10.94 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.53
|
|
|
|
Master General Agent Agreement,
dated April 16, 2003, between The Chesapeake Life Insurance
Company and Tim McCoy & Associates, Inc. (NEAT) filed
as exhibit 10.95 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.54
|
|
|
|
Master General Agent Agreement,
dated March 29, 2004, between The Chesapeake Life Insurance
Company and Life Professionals Marketing Group, Inc. filed as
exhibit 10.96 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.55
|
|
|
|
Assumption Reinsurance and
Marketing Agreement, dated October 8, 2004, among The
Chesapeake Life Insurance Company; HEI Exchange, Inc. (formerly
HealthMarket Inc.); and American Travelers Assurance Company ,
as amended by Amendment No. 1 thereto dated March 1,
2005 filed as exhibit 10.97 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.56
|
|
|
|
Asset Sale Agreement, effective
January 1, 1997, as amended by Amendments No, 1, 2, 3
and 4 thereto, between UICI and Specialized Investment Risks,
inc. (formerly known as United Group Agency, Inc.) filed as
exhibit 10.98 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.57
|
|
|
|
Loan Underwriting and Processing
Agreement, dated June 12, 2002, between Richland State Bank
and the College Fund Life Division of The MEGA Life and
Health Insurance Company filed as exhibit 10.99 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.58
|
|
|
|
Loan Origination and Sale
Agreement, dated July 28, 2005, between Richland State
Bank, Richland Loan Processing Center, Inc. and UICI and UICI
Funding Corp 2 filed as exhibit 10.100 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.59
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005, between Specialized Association Services,
Inc. and The MEGA Life and Health Insurance Company filed as
exhibit 10.101 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.60
|
|
|
|
Administrative Services Agreement,
dated as of January 1, 2005, between NMC Holdings, Inc. and
The MEGA Life and Health Insurance Company and amendment dated
July 1, 2005 filed as exhibit 10.102 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.61
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Performance Driven Awards, Inc.
and the National Association for the Self-Employed filed as
exhibit 10.103 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.62
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Performance Driven Awards, Inc.
and Americans for Financial Security, Inc. filed as
exhibit 10.104 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.63
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Success Driven Awards, Inc. and
Alliance for Affordable Services filed as exhibit 10.105 to
the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.64
|
|
|
|
Form of Stock Grant under
UICIs 2005 Restricted Stock Agreement filed as
exhibit 10.106 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.65
|
|
|
|
Vendor Agreement, effective
January 1, 2003 between Specialized Association Services,
LTD and Benefit Administration for the Self-Employed filed as
exhibit 10.107 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.66
|
|
|
|
Vendor Agreement, effective
January 1, 2005 between Specialized Association Services,
LTD and Benefit Administration for the Self-Employed filed as
exhibit 10.108 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.67
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Jeffrey James Jensen
filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.68
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Jami Jill Jensen filed
as Exhibit 10.2 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.69
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Janet Jarie Jensen
filed as Exhibit 10.3 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.70
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and James Joel Jensen
filed as Exhibit 10.4 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.71
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Julie Jean Jensen
filed as Exhibit 10.5 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.72
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Gladys M. Jensen filed
as Exhibit 10.6 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.73*
|
|
|
|
Term Sheet for New Employment
Agreement for William J. Gedwed, dated as of September 15,
2005, filed as Exhibit 10.7 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.74*
|
|
|
|
Term Sheet for New Employment
Agreement for William J. Truxal, dated as of September 15,
2005, filed as Exhibit 10.8 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.75*
|
|
|
|
Term Sheet for New Employment
Agreement for Troy McQuagge, dated as of September 15,
2005, filed as Exhibit 10.9 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.76*
|
|
|
|
Term Sheet for New Employment
Agreement for Phillip J. Myhra, dated as of September 15,
2005, filed as Exhibit 10.10 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.77*
|
|
|
|
UICI Success Award Bonus Plan,
dated as of September 15, 2005, filed as Exhibit 10.11
to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.78*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and William J. Gedwed,
filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.79*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and Phillip J. Myhra,
filed as Exhibit 10.2 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.80*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and Troy A. McQuagge,
filed as Exhibit 10.3 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.81*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and William Truxal,
filed as Exhibit 10.4 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.82*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and Mark Hauptman, filed
as Exhibit 10.5 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.83*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and Timothy L. Cook,
filed as Exhibit 10.6 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.84*
|
|
|
|
Employment Agreement, dated as of
April 4, 2006, by and between UICI and James N. Plato,
filed as Exhibit 10.7 to the Current Report on
Form 8-K
dated April 4, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.85
|
|
|
|
Credit Agreement, dated as of
April 5, 2006, among UICI, HealthMarkets, LLC, JPMorgan
Chase Bank, N.A., as Administrative Agent and L/C Issuer, each
lender from time to time party thereto, Morgan Stanley Senior
Funding Inc., as Syndication Agent, and Goldman Sachs Credit
Partners L.P., as Documentation Agent, filed as
Exhibit 10.1 to the Current Report on
Form 8-K
dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.86
|
|
|
|
Stockholders Agreement,
dated as of April 5, 2006, by and among UICI and certain
stockholders named therein, filed as Exhibit 4.1 to
Post-Effective Amendment No. 1 to Registration Statement on
Form S-8
filed on April 6, 2006, File
No. 033-77690,
and incorporated by reference herein.
|
|
10
|
.87*
|
|
|
|
UICI Restated and Amended 1987
Stock Option Plan (Non-Qualified)(As Amended and Restated
Effective March 15, 2006), filed as Exhibit 4.3 to
Post-Effective Amendment No. 1 to Registration Statement on
Form S-8
filed on April 6, 2006, File
No. 033-77690,
and incorporated by reference herein.
|
|
10
|
.88
|
|
|
|
Registration Rights and
Coordination Committee Agreement, dated as of April 5,
2006, by and among UICI and certain stockholders named therein,
filed as Exhibit 10.3 to the Current Report on
Form 8-K
dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.89
|
|
|
|
Purchase Agreement, dated as of
March 7, 2006, among Premium Finance LLC, Mulberry Finance
Co., Inc., DLJMB IV First Merger LLC, Merrill Lynch
International, and First Tennessee Bank National Association,
filed as Exhibit 10.4 to the Current Report on
Form 8-K
dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.90
|
|
|
|
Assignment and Assumption and
Amendment Agreement, dated as of April 5, 2006, among
HealthMarkets, LLC, HealthMarkets Capital Trust I,
HealthMarkets Capital Trust II, Premium Finance LLC,
Mulberry Finance Co., Inc., DLJMB IV First Merger LLC, First
Tennessee Bank National Association, Merrill Lynch International
and ALESCO Preferred Funding X, Ltd., filed as Exhibit 10.5
to the Current Report on
Form 8-K
dated April 5, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.91
|
|
|
|
HealthMarkets, Inc. Agents
Total Ownership Plan (As Amended and Restated Effective
April 5, 2006), filed as Exhibit 4.2 to Registration
Statement on
Form S-8
filed on April 28, 2006, File
No. 333-133650,
and incorporated by reference herein.
|
|
10
|
.92
|
|
|
|
HealthMarkets, Inc. Agency
Matching Total Ownership Plan (As Amended and Restated Effective
April 5, 2006), filed as Exhibit 4.3 to Registration
Statement on
Form S-8
filed on April 28, 2006, File
No. 333-133650,
and incorporated by reference herein.
|
|
10
|
.93
|
|
|
|
HealthMarkets, Inc. Agents
Contribution to Equity Plan (As Amended and Restated Effective
April 5, 2006), filed as Exhibit 4.4 to Registration
Statement on
Form S-8
filed on April 28, 2006, File
No. 333-133650,
and incorporated by reference herein.
|
|
10
|
.94
|
|
|
|
HealthMarkets, Inc. Matching
Agency Contribution Plan (As Amended and Restated Effective
April 5, 2006), filed as Exhibit 4.5 to Registration
Statement on
Form S-8
filed on April 28, 2006, File
No. 333-133650,
and incorporated by reference herein.
|
|
10
|
.95
|
|
|
|
HealthMarkets, Inc. Initial Total
Ownership Plan (As Amended and Restated Effective April 5,
2006).
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.96
|
|
|
|
HealthMarkets, Inc. Agents
Stock Accumulation Plan (As Amended and Restated Effective
April 5, 2006).
|
|
10
|
.97*
|
|
|
|
HealthMarkets 2006 Management
Option Plan, filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated May 8, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.98*
|
|
|
|
Form of Nonqualified Stock Option
Agreement among HealthMarkets, Inc. and various optionees, filed
as Exhibit 10.2 to the Current Report on
Form 8-K
dated May 8, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.99
|
|
|
|
Future Transactions Fee Agreement,
dated as of May 11, 2006, between HealthMarkets, Inc. and
Blackstone Management Partners IV L.L.C., filed as
Exhibit 10.1 to the Current Report on
Form 8-K
dated May 11, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.100
|
|
|
|
Future Transactions Fee Agreement,
dated as of May 11, 2006, between HealthMarkets, Inc. and
Goldman Sachs & Co., filed as Exhibit 10.2 to the
Current Report on
Form 8-K
dated May 11, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.101
|
|
|
|
Future Transactions Fee Agreement,
dated as of May 11, 2006, between HealthMarkets, Inc. and
DLJ Merchant Banking, Inc., filed as Exhibit 10.3 to the
Current Report on
Form 8-K
dated May 11, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.102*
|
|
|
|
Agreement, dated as of
May 24, 2006, between HealthMarkets, Inc. and Glenn W.
Reed, filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated May 19, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.103
|
|
|
|
Termination Agreement, dated as of
May 19, 2006, between HealthMarkets, Inc. and Special
Investment Risks Limited , filed as Exhibit 10.2 to the
Current Report on
Form 8-K
dated May 19, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.104*
|
|
|
|
Subscription Agreement, dated
June 13, 2006, between HealthMarkets, Inc. and Steven J.
Shulman, filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated June 9, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.105*
|
|
|
|
Nonqualified Stock Option
Agreement dated as of June 9, 2006, between HealthMarkets,
Inc. and Steven J. Shulman, filed as Exhibit 10.2 to the
Current Report on
Form 8-K
dated June 9, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.106*
|
|
|
|
Subscription Agreement, dated
July 1, 2006, between HealthMarkets, Inc. and Allen F.
Wise, filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated July 1, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.107*
|
|
|
|
Nonqualified Stock Option
Agreement, dated as of July 1, 2006, between HealthMarkets,
Inc. and Allen F. Wise, filed as Exhibit 10.2 to the
Current Report on
Form 8-K
dated July 1, 2006, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.108*
|
|
|
|
Nonqualified Stock Option
Agreement, dated as of August 30, 2006, between
HealthMarkets, Inc. and Andrew S. Kahr, filed as
Exhibit 10.1 to the Current Report on
Form 8-K
dated August 30, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.109*
|
|
|
|
Employment Agreement, dated as of
September 26, 2006, by and between HealthMarkets, Inc. and
Michael E. Boxer, filed as Exhibit 10.1 to the Current
Report on
Form 8-K
dated September 26, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.110*
|
|
|
|
Nonqualified Stock Option
Agreement, dated as of September 26, 2006, between
HealthMarkets, Inc. and Michael E. Boxer, filed as
Exhibit 10.2 to the Current Report on
Form 8-K
dated September 26, 2006, File
No. 001-14953,
and incorporated by reference herein.
|
|
10
|
.111
|
|
|
|
Advisory Fee Agreement, dated as
of August 18, 2006, between The MEGA Life and Health
Insurance Company and the Blackstone Group, L.P.
|
|
10
|
.112
|
|
|
|
Placement Fee Agreement, dated as
of August 18, 2006, between HealthMarkets, Inc. and The
Blackstone Group, L.P.
|
|
10
|
.113
|
|
|
|
Amendment dated as of
December 29, 2006 to Advisory Fee Agreement, dated as of
August 18, 2006, between The MEGA Life and Health Insurance
Company and the Blackstone Group, L.P.
|
|
21
|
|
|
|
|
Subsidiaries of HealthMarkets
|
|
23
|
|
|
|
|
Consent of Independent Registered
Public Accounting Firm-KPMG LLP
|
|
24
|
|
|
|
|
Power of Attorney
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
31
|
.1
|
|
|
|
Certification of William J.
Gedwed, Chief Executive Officer of the Registrant, required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934
|
|
31
|
.2
|
|
|
|
Certification of Michael E. Boxer,
Chief Financial Officer of the Registrant, required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934
|
|
32
|
.1
|
|
|
|
Certification of William J.
Gedwed, Chief Executive Officer of the Registrant, pursuant to
§906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Michael E. Boxer,
Chief Financial Officer of the Registrant, pursuant to §906
of the Sarbanes-Oxley Act of 2002
|
|
99
|
.1
|
|
|
|
Voting Agreement, dated as of
September 15, 2005, filed as Exhibit 99.1 to the
Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953,
and incorporated by reference herein
|
|
|
|
* |
|
Indicates that exhibit constitutes an Executive Compensation
Plan or Arrangement |