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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year
ended December 31, 2000
Commission File Number 1-8538
ASCENT ASSURANCE, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 73-1165000
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
110 West Seventh Street, Fort Worth, Texas 76102
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:
(817) 878-3300
Registrant's Shareholder and Investor Relations Telephone Number
(817) 877-3048
Securities Registered Pursuant to Section 12(b) of the Act:
-----------------------------------------------------------
None
Securities Registered Pursuant to Section 12(g) of the Act:
-----------------------------------------------------------
Common Stock (par value $.01)
Warrants to purchase Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive Proxy Statement or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
X
---------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--------- ---------
The aggregate market value of voting stock held by non-affiliates of the
Registrant amounted to $9,750,000 as of March 29, 2001.
On March 29, 2001, 6,500,000 shares of Common Stock were outstanding.
ASCENT ASSURANCE, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. Business 2
ITEM 2. Properties 9
ITEM 3. Legal Proceedings 9
ITEM 4. Submission of Matters to a Vote of Security Holders 9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters 10
ITEM 6. Selected Consolidated Financial Data 11
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 8. Financial Statements and Supplementary Data 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 72
PART III
ITEM 10. Directors and Executive Officers of the Registrant 73
ITEM 11. Executive Compensation 73
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 73
ITEM 13. Certain Relationships and Related Transactions 73
PART IV
ITEM 14. Financial Statement Schedules, Exhibits and Reports on Form 8-K 74
PART I
ITEM 1 - BUSINESS
GENERAL
Ascent Assurance, Inc. ("Ascent"), a Delaware company incorporated in 1982, is
an insurance holding company engaged in the development, marketing, underwriting
and administration of medical expense and supplemental health insurance
products, primarily to self-employed individuals and small business owners.
Ascent adopted its corporate name on March 24, 1999, the date its predecessor,
Westbridge Capital Corp. ("Westbridge"), emerged from Chapter 11 reorganization
proceedings. References herein to the "Company" shall mean for all periods on or
prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on
or after the close of business on March 31, 1999, Ascent and its subsidiaries.
The Company's revenues result primarily from premiums and fees from the
insurance products sold by its wholly owned life and health insurance
subsidiaries National Foundation Life Insurance Company ("NFL"), Freedom Life
Insurance Company of America ("FLICA"), National Financial Insurance Company
("NFIC") and American Insurance Company of Texas ("AICT"), and together with
NFL, NFIC and FLICA, collectively, the "Insurance Subsidiaries" and marketed by
NationalCare(R) Marketing, Inc. ("NCM"), also a wholly owned subsidiary. To a
lesser extent, the Company derives revenue from (i) telemarketing services, (ii)
printing services and (iii) renewal commissions for prior year sales of
unaffiliated insurance products.
MARKETING DISTRIBUTION SYSTEM
The Insurance Subsidiaries are licensed to conduct business in 40 states and the
District of Columbia. Each of the following states accounted for more than 5% of
premium revenue for the year ended December 31, 2000: Texas - 20 %, Florida -
11%, North Carolina - 6%, Tennessee - 6% and Arkansas - 6%. During 2000 and
1999, new business was produced only in NFL and FLICA, with FLICA underwriting
approximately 88% of new policies issued. In April 2000, NFL began reinsuring
60% of the risk under new major medical policies issued by FLICA. Premium
revenue, in thousands, for each Insurance Subsidiary is set forth below.
Year Ended December 31,
------------------------------------------
2000 1999 1998
----------- ----------- -----------
FLICA:
First-year $ 19,804 $ 15,809 $ 7,714
Renewal 23,516 14,938 11,769
----------- ----------- -----------
43,320 30,747 19,483
----------- ----------- -----------
NFL:
First-year 10,676 1,594 6,206
Renewal 44,796 55,231 66,285
----------- ----------- -----------
55,472 56,825 72,491
----------- ----------- -----------
NFIC:
First-year - - 4,149
Renewal 15,093 21,198 29,035
----------- ----------- -----------
15,093 21,198 33,184
----------- ----------- -----------
AICT:
First-year - - 1,092
Renewal 5,519 7,549 9,467
----------- ----------- -----------
5,519 7,549 10,559
Other:
First-year 504 - -
Renewal - - -
----------- ----------- -----------
504 - -
----------- ----------- -----------
Consolidated Premium Revenue $ 119,908 $ 116,319 $ 135,717
=========== =========== ===========
NCM was formed in early 1998 and is the principal distribution channel for the
Insurance Subsidiaries' products. NCM recruits agents as independent contractors
who market the Insurance Subsidiaries' products on a one-to-one basis to
individuals who are either not covered under group insurance protection normally
available to employees of business organizations or who wish to supplement
existing coverage.
Agents' sales contacts generally result from leads generated either by the
Company's telemarketing subsidiary or through outside sources. By utilizing a
predictive automated dialing system, the Company believes its wholly owned
telemarketing subsidiary, Precision Dialing Services, Inc. ("PDS") is able to
generate a sufficient number of quality sales leads. By providing its agents
with these sales leads, the Company believes it can attract experienced agents
as well as new agents entering the business.
DESCRIPTION OF PRODUCTS
The Company's operations are comprised of one segment, Accident and Health
insurance. The principal products currently marketed by NCM and underwritten by
the Insurance Subsidiaries are all medical expense reimbursement policies. These
products are designed with flexibility as to benefits, deductibles, coinsurance
and premium payments, which can be adapted to meet regional sales or competitive
needs, as well as those of the individual policyholders. The principal product
groups currently underwritten by the Insurance Subsidiaries are summarized
below:
Comprehensive major medical products - These products are generally designed to
reimburse insureds for eligible expenses incurred for hospital confinement,
surgical expenses, physician services, outpatient services and the cost of
medicines. The policies provide a number of options with respect to annual
deductibles, coinsurance percentages, maximum benefits and stop-loss limits.
After the annual deductible is met, the insured is responsible for a percentage
of eligible expenses up to a specified stop-loss limit. Thereafter, eligible
expenses are covered by the Insurance Subsidiaries up to certain maximum
aggregate policy limits. All such products are guaranteed renewable pursuant to
the Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et
seq. ("HIPAA").
Hospital/surgical major medical products - These products are similar to
comprehensive major medical products except that benefits are limited to
hospital/surgical services (services such as routine well care physician visits
and prescription drugs are excluded) and deductibles and coinsurance provisions
are generally higher. All such products are guaranteed renewable pursuant to the
Health Insurance Portability and Accountability Act, 42 U.S.C. ss. 300 et seq.
("HIPAA").
Supplemental specified disease products - These products include indemnity
policies for hospital confinement and convalescent care for treatment of
specified diseases and "event specific" policies, which provide fixed benefits
or lump sum payments upon diagnosis of certain types of internal cancer or other
catastrophic diseases. Benefits are payable directly to the insured following
diagnosis of or treatment for a covered illness or injury. Specified disease
products are generally guaranteed renewable by contract, but are exempt from
HIPAA.
Major medical products comprise approximately 95% of new business sales. These
products are individually underwritten based upon medical information provided
by the applicant prior to issue. Information provided in the application is
verified with the applicant through a tape-recorded telephone conversation or
through written correspondence. In addition, the major medical products
currently underwritten by the Insurance Subsidiaries are stringently
underwritten and include a para-med examination or other medical tests,
depending on the age of the applicant.
Prior to 1998, the Insurance Subsidiaries also underwrote Medicare Supplement
products designed to provide reimbursement for certain expenses not covered by
the Medicare program. The Insurance Subsidiaries continue to receive premiums on
Medicare Supplement policies sold prior to that date.
See Item 7. "Management's Discussion and Analysis of Results of Operations and
Financial Condition" for a discussion of premium revenue by product.
COMPETITION
The accident and health insurance industry is highly competitive and includes a
large number of insurance companies, many of which have substantially greater
financial resources, broader and more diversified product lines, favorable
ratings from A.M. Best Company, Inc. ("A.M. Best") and larger staffs than the
Company. Competitive factors applicable to the Company's business include
product mix, policy benefits, service to policyholders and premium rates. The
Company believes that its current benefits and premium rates are generally
competitive with those offered by other companies. Management believes that
service to policyholders and prompt and fair payment of claims continue to be
important factors in the Company's ability to remain competitive. The Insurance
Subsidiaries are not currently rated with A.M. Best. The Company believes that
its lack of an A.M. Best rating is not a significant factor affecting its
ability to sell its products in the markets that it serves.
Private insurers and voluntary and cooperative plans, such as Blue Cross and
Blue Shield and HMOs, provide various alternatives for defraying hospitalization
and medical expenses. Much of this insurance is sold on a group basis to
employer sponsored groups. The federal and state governments also provide
programs for the payment of the costs associated with medical care through
Medicare and Medicaid. These major medical programs generally cover a
substantial amount of the medical expenses incurred as a result of accidents or
illnesses. The Company's major medical products are designed to provide coverage
which is similar to these major medical insurance programs but are sold
primarily to persons not covered by an employer sponsored group.
The Company's supplemental specified disease products are designed to provide
coverage which is supplemental to major medical insurance and may be used to
defray non-medical as well as medical expenses. Since these policies are sold to
complement major medical insurance, the Company competes only indirectly with
those insurers providing major medical insurance, however, other insurers may
expand coverage in the future which could reduce future sales levels and profit
margins. Medicare supplement products are designed to supplement the Medicare
program by reimbursing for expenses not covered by such program. Future
government programs may reduce participation by private entities in such
government programs.
In addition to product and service competition, there is also very strong
competition within the accident and health insurance market for qualified,
effective agents. The recruitment and retention of such agents is important to
the success and growth of the Company's business. Management believes that the
Company is competitive with respect to the recruitment and training of agents.
However, there can be no assurance that the Company will be able to continue to
recruit or retain qualified, effective agents.
REGULATION
General. The Company and its Insurance Subsidiaries are subject to regulation
and supervision in all jurisdictions in which they conduct business. In general,
state insurance laws establish supervisory agencies with broad administrative
powers relating to, among other things, the granting and revoking of licenses to
transact business, regulation of trade practices, premium rate levels, premium
rate increases, licensing of agents, approval of content and form of policies,
maintenance of specified minimum statutory reserves and statutory capital and
surplus, deposits of securities, form and content of required financial
statements, nature of investments and limitations on dividends to stockholders.
The purpose of such regulation and supervision is primarily to provide
safeguards for policyholders rather than to protect the interests of
stockholders.
The Insurance Subsidiaries' health insurance products are subject to rate
regulation by state insurance departments, which generally require the
maintenance of certain minimum loss ratios. The states in which the Company is
licensed have the authority to change the minimum mandated statutory loss ratios
to which the Company is subject, the manner in which these ratios are computed
and the manner in which compliance with these ratios is measured and enforced.
Most states in which the Company writes health insurance products have adopted
the loss ratios recommended by the National Association of Insurance
Commissioners ("NAIC"). The Company is unable to predict the impact of (i) any
changes in the mandatory statutory loss ratios relating to products offered by
the Company or (ii) any change in the manner in which these minimums are
computed or enforced in the future. Similarly, the Company's ability to increase
its premium rates in response to adverse loss ratios is subject to regulatory
approval. Failure to obtain such approval could have a material adverse effect
on the Company's business, financial condition and results of operations.
Generally, before the Company is permitted to market an insurance product in a
particular state, it must obtain regulatory approval from that state and adhere
to that state's insurance laws and regulations which include, among other
things, specific requirements regarding the form, language, premium rates and
policy benefits of that product. Consequently, although the Company's policies
generally provide for the same basic types and levels of coverage in each of the
states in which they are marketed, the policies are not precisely identical in
each state or other jurisdiction in which they are sold. Such regulation may
delay the introduction of new products and may impede, or impose burdensome
conditions on, rate increases or other actions that the Company may wish to take
in order to enhance its operating results. In addition, federal or state
legislation or regulatory pronouncements may be enacted that may prohibit or
impose restrictions on the ability to sell certain types of insurance products
or impose other restrictions on the Company's operations. For example, certain
states in which the Company does business have adopted NAIC model statutes and
regulations relating to market conduct practices of insurance companies. Any
limitations or other restrictions imposed on the Company's market conduct
practices by the regulators of a state that has adopted the model statutes and
regulations may also be imposed by the regulators in other states which have
adopted such statutes and regulations. No assurances can be given that future
legislative or regulatory changes will not adversely affect the Company's
business, financial condition or results of operations.
Many states have enacted insurance holding company laws that require
registration and periodic reporting by insurance companies within their
jurisdictions. Such legislation typically places restrictions on, or requires
prior notice or approval of, certain transactions within the holding company
system, including, without limitation, dividend payments from insurance
subsidiaries and the terms of loans and transfers of assets within the holding
company structure.
NAIC Accounting Principles. In 1998, the NAIC adopted the Codification of
Statutory Accounting Principles guidance, which will replace the current
Accounting Practices and Procedures manual as the NAIC's primary guidance on
statutory accounting. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
certain areas. The insurance departments of the states of domicile of the
Company's insurance subsidiaries have adopted the Codification effective January
1, 2001. The Company does not expect the Codification to materially impact
statutory surplus.
Risk-Based Capital. The NAIC's Risk-Based Capital for Life and/or Health
Insurers Model Act (the "Model Act") provides a tool for insurance regulators to
determine the levels of statutory capital and surplus an insurer must maintain
in relation to its insurance and investment risks and whether there is a need
for possible regulatory attention. The Model Act (or similar legislation or
regulation) has been adopted in states where the Insurance Subsidiaries are
domiciled. The Model Act provides four levels of regulatory attention, varying
with the ratio of the insurance company's total adjusted capital (defined as the
total of its statutory capital and surplus, asset valuation reserve and certain
other adjustments) to its risk-based capital ("RBC"). If a company's total
adjusted capital is less than 100 percent but greater than or equal to 75
percent of its RBC, or if a negative trend (as defined by the NAIC) has occurred
and total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan aimed at improving its
capital position to the regulatory authority proposing corrective actions. If a
company's total adjusted capital is less than 75 percent but greater than or
equal to 50 percent of its RBC (the "Regulatory Action Level"), the regulatory
authority will perform a special examination of the company and issue an order
specifying the corrective actions that must be followed. If a company's total
adjusted capital is less than 50 percent but greater than or equal to 35 percent
of its RBC (the "Authorized Control Level"), the regulatory authority may take
any action it deems necessary, including placing the company under regulatory
control. If a company's total adjusted capital is less than 35 percent of its
RBC (the "Mandatory Control Level"), the regulatory authority must place the
company under its control.
Effective September 28, 2000, NFL and FLICA changed their state of incorporation
from Delaware and Mississippi, respectively, to the state of Texas. As a result,
the Insurance Subsidiaries are all Texas domestic companies and are subject to
regulation under Texas insurance laws. The Texas Department of Insurance adopted
the NAIC's RBC Model Act during 2000. NFL's and FLICA's statutory annual
statements for the year ended December 31, 2000 filed with the Texas Department
of Insurance reflected total adjusted capital in excess of Company Action Level
RBC; however, FLICA did not meet the negative trend test. Due to adverse claims
experience for major medical products, FLICA required an additional capital
contribution in April 2001 to maintain Company Action Level RBC at March 31,
2001 (see "Liquidity, Capital Resources, and Statutory Capital and Surplus" at
Item 7).
In 1998, NFIC and AICT entered into a voluntary consent order, pursuant to
Article 1.32 of the Texas Insurance Code, providing for the continued monitoring
of the operations of NFIC and AICT by the Texas Department of Insurance in
response to losses sustained in 1997 and 1998 as well as the projected inability
to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of
new business in 1998. At December 31, 2000, AICT's RBC exceeded Company Action
Level RBC; however, NFIC's RBC only exceeded Authorized Control Level RBC. Both
NFIC and AICT are in compliance with the terms of the voluntary consent order.
Premium Writing Ratios. Under Florida Statutes Section 624.4095, Florida
licensed insurance companies' ratio of actual or projected annual written
premiums to current or projected surplus with regards to policyholders ("the
premium writing ratio") may not exceed specified levels for gross and net
written premiums as defined by the statute. If a company exceeds the premium
writing ratio, the Florida Department of Insurance shall suspend the company's
certificate of authority in Florida or establish by order maximum gross or net
annual premiums to be written by the company consistent with maintaining the
ratios specified. At December 31, 2000, the premium writing ratio for FLICA,
which currently underwrites insurance policies in Florida, exceeded the limit
mandated by Florida law. In April 2001, FLICA received the required capital
contribution to meet the Florida premium writing ratio. As FLICA produces 88% of
the Company's new business and approximately 40% of its new business production
is in the state of Florida, maintaining the ability to write new business in
Florida is a significant factor in the Company's current business plan.
Continued adverse claims experience for major medical products could have a
material adverse impact on FLICA's ability to maintain compliance with the
Florida premium writing ratio and a material adverse effect on the Company's
business (see "Liquidity, Capital Resources, and Statutory Capital and Surplus"
at Item 7).
Dividends. Dividends paid by the Insurance Subsidiaries are determined by and
subject to the regulations of the insurance laws and practices of the Texas
Department of Insurance. The Texas Insurance Code allows life and health
insurance companies to make dividend payments from surplus profits or earned
surplus arising from its business. Earned surplus is defined as unassigned
surplus excluding any unrealized gains. Texas life and health insurance
companies may generally pay ordinary dividends or make distributions of cash or
other property within any twelve month period with a fair market value equal to
or less than the greater of 10% of surplus as regards policyholders as of the
preceding December 31 or the net gain from operations for the twelve month
period ending on the preceding December 31. Dividends exceeding the applicable
threshold are considered extraordinary and require the prior approval of the
Texas Insurance Commissioner.
The Insurance Subsidiaries are precluded from paying dividends during 2001
without prior approval of the Texas Insurance Commissioner as the companies'
earned surplus is negative. On September 30, 2000, NFL transferred its 100%
ownership of FLICA to Ascent through an extraordinary dividend approved by the
Texas Department of Insurance.
Guaranty Associations. The Company may be required, under the solvency or
guaranty laws of most states in which it does business, to pay assessments (up
to prescribed limits) to fund policyholder losses or liabilities of insurance
companies that become insolvent. Non-affiliated insurance company insolvencies
increase the possibility that such assessments may be required. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. The incurrence and amount of such
assessments may increase in the future without notice. The Company pays the
amount of such assessments as they are incurred. Assessments that cannot be
offset against future premium taxes are charged to expense. Assessments that
qualify for offset against future premium taxes are capitalized and are offset
against such future premium taxes. As a result of such assessments, the Company
paid approximately $77,000 during the year ended December 31, 2000.
Federal Regulation. Traditionally, the U.S. Government has not directly
regulated the insurance business. However, the adoption of HIPAA, as well as
other proposed federal initiatives, impacts the insurance business in a variety
of ways. Current and proposed federal measures that may significantly affect the
insurance industry include controls on the cost of medical care, medical
entitlement programs (e.g., Medicare), guaranteed renewability and portability
of certain coverage, and minimum solvency requirements for insurers.
The Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley Act",
or "GLBA") contains privacy provisions and introduces new controls over the
transfer and use of individuals' nonpublic personal data by financial
institutions, including insurance companies, insurance agents and brokers
licensed by state insurance regulatory authorities. Numerous pieces of federal
and state legislation aimed at protecting the privacy of nonpublic personal
financial and health information are pending. The privacy provisions of GLBA
became effective in November 2000, but required compliance with GLBA has been
deferred and is optional until July 1, 2001. By July 1, 2001, the Company is
required to provide written notice of its privacy practices to all of the
Company's insureds. In addition, the Company must provide insureds with an
opportunity to state their preferences regarding the Company's use of their
non-public personal information.
GLBA provides that there is no federal preemption of a state's insurance related
privacy laws if the state law is more stringent than the privacy rules imposed
under GLBA. Pursuant to the authority granted under GLBA to state insurance
regulatory authorities to regulate, the National Association of Insurance
Commissioners has recently promulgated a new model regulation called Privacy of
Consumer Financial and Health Information Regulation. Numerous state insurance
authorities are expected to adopt this model regulation before July 1, 2001,
while some states must pass legislative reforms to allow implementation of new
state privacy rules pursuant to GLBA. At the present time, the impact of the
privacy provisions of GLBA or any state privacy legislation on the Company's
financial condition or results of operations is not estimable.
REORGANIZATION EFFECTIVE MARCH 24, 1999
On September 16, 1998, Westbridge commenced its reorganization by filing a
voluntary petition for relief under Chapter 11, Title 11 of the United States
Code in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"), along with a disclosure statement (as amended, the
"Disclosure Statement") and a proposed plan of reorganization (as amended, the
"Plan"). The filing of the Disclosure Statement and Plan culminated months of
negotiations between Westbridge and an ad hoc committee (the "Creditors'
Committee") of holders of its 11% Senior Subordinated Notes due 2002 (the
"Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004 (the
"Convertible Notes"). The Disclosure Statement was approved by entry of an order
by the Bankruptcy Court on October 30, 1998. Following the approval of the Plan
by the holders of allowed claims and equity interests, the Bankruptcy Court
confirmed the Plan on December 17, 1998. The Plan became effective March 24,
1999 (the "Effective Date"). On the Effective Date, Westbridge's certificate of
incorporation and by-laws were amended and restated in their entirety and
pursuant thereto, Westbridge changed its corporate name to "Ascent Assurance,
Inc.".
The following summary of the Plan omits certain information set forth in the
Plan. Any statements contained herein concerning the Plan are not necessarily
complete, and in each such instance reference is made to the Plan, a copy of
which is incorporated by reference to Exhibit 2 of Westbridge's Current Report
on Form 8-K which was filed with the Securities and Exchange Commission on
December 29, 1998. Each such statement is qualified in its entirety by such
reference. The Plan provided for the recapitalization of certain old debt and
equity interests in Westbridge and the issuance of new equity securities and
warrants. Key terms of the Plan included the following:
Cancellation of Existing Securities. Pursuant to the Plan, the following
securities of Westbridge were canceled as of the Effective Date: (i) $23.3
million aggregate principal amount and all accrued and unpaid interest on, the
Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and
unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate
liquidation preference of and all accrued and unpaid dividends on, Westbridge's
Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred
Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old
Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi)
all outstanding unexercised stock options to purchase Old Common Stock, and
(vii) all unvested grants of restricted Old Common Stock.
New Equity Capital Structure. Pursuant to Ascent's Amended and Restated
Certificate of Incorporation, the total number of shares of capital stock Ascent
has the authority to issue is 30,040,000, consisting of 30,000,000 shares of
common stock, par value $.01 per share (the "New Common Stock") and 40,000
shares of preferred stock, par value $.01 per share, all of which are designated
Series A Convertible Preferred Stock (the "New Preferred Stock").
Distributions Under the Plan
Cash Distribution
To the holders of Senior Notes other than Credit Suisse First Boston Corporation
("CSFB"), cash payments totaling approximately $15.2 million, which equaled the
total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors
other than CSFB, were distributed subject to completion of the exchange of
securities as contemplated by the Plan. In order to provide the Company with
sufficient funds to make the cash distribution to the holders of the 11% Senior
Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate") purchased all
of the shares of the New Preferred Stock which were not otherwise distributed
under the Plan.
Issuance of New Securities
Pursuant to the Plan and the purchase of New Preferred Stock, 6,500,000 shares
of New Common Stock and 23,257 shares of New Preferred Stock were issued,
subject to the completion of the exchange requirements as contemplated by the
Plan, on the Effective Date as follows:
|X| To holders of general unsecured claims and Convertible Notes as of December
10, 1998, 6,077,500 shares, and to management at the Effective Date, 32,500
shares, or in aggregate 94% of the New Common Stock issued on the Effective
Date. Holders of general unsecured claims and Convertible Notes received
their first distribution of shares in partial satisfaction and discharge of
their allowed claims in April 1999. The second distribution was made in
September 1999 and the remaining shares of New Common Stock were
distributed in November 1999.
|X| To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares,
or 4%, of the New Common Stock issued on the Effective Date and Warrants
("New Warrants") to purchase an additional 277,505 shares, or 2%, of the
New Common Stock issued on the Effective Date, on a fully diluted basis.
|X| To holders of Old Common Stock as of December 10, 1998, 130,000 shares, or
2%, of the New Common Stock issued on the Effective Date and New Warrants
to purchase an additional 693,761 shares, or 5%, of the New Common Stock
issued on the Effective Date, on a fully diluted basis. Fractional shares
of New Common Stock were not issued in connection with the Plan. As a
result of this provision, certain holders of Old Common Stock received no
distribution of New Common Stock or New Warrants under the Plan.
|X| To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of
December 10, 1998, 8,090 shares of New Preferred Stock which, together with
the 15,167 additional shares of New Preferred Stock purchased by the CSFB
Affiliate as described above, were convertible into 4,765,165 shares of the
New Common Stock on March 24, 1999. As a result of the New Preferred Stock
received by the CSFB Affiliate, together with the 3,093,998 shares of New
Common Stock received by the CSFB Affiliate in respect of the Convertible
Notes owned by CSFB, the CSFB Affiliate beneficially owned on March 24,
1999 approximately 56.6% of the New Common Stock on an as converted basis,
assuming the exercise of all New Warrants and issuance of New Common Stock
reserved under the 1999 Stock Option Plan as discussed below. The New
Preferred Stock has a stated value of $1,000 per share and a cumulative
annual dividend rate of $102.50 per share payable in January of each year
in cash or by the issuance of additional shares of New Preferred Stock. The
New Preferred Stock is convertible at any time into 204.8897 shares of New
Common Stock at an initial conversion price of $4.88 per share of New
Common Stock, subject to customary anti-dilution adjustments.
Reservation of Additional New Common Stock
In connection with the New Warrants described above, 971,266 shares of New
Common Stock have been reserved for issuance upon the exercise of New
Warrants. The New Warrants are exercisable at an initial exercise price of
$9.04 per share of New Common Stock, subject to customary anti-dilution
adjustments, and will expire on March 24, 2004.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted
number of shares of New Common Stock issued and outstanding on the
Effective Date have been reserved for issuance to employees and directors,
and up to 387,119 shares, or 3%, of the fully diluted number of shares of
New Common Stock issued on the Effective Date have been reserved for
issuance to the Company's marketing agents under the Company's 1999 Stock
Option Plan, which was approved by the Company's shareholders.
EMPLOYEES
At December 31, 2000, the Company employed 650 persons. The Company has not
experienced any work stoppages, strikes or business interruptions as a result of
labor disputes involving its employees, and the Company considers its relations
with its employees to be good.
ITEM 2 - PROPERTIES
The Company's principal offices are located at 110 West Seventh Street, Fort
Worth, Texas. The lease for this facility expires in April, 2003. Westbridge
Printing Services, Inc., the Company's wholly owned printing subsidiary,
maintains its facility at 7333 Jack Newell Boulevard North, Fort Worth, Texas,
under a lease agreement which expires in October, 2005. Precision Dialing
Services, the Company's wholly owned telemarketing subsidiary, maintains its
facility at 9550 Forest Lane, Dallas, Texas under a lease agreement which
expires in December, 2003. The Company believes that its leased facilities will
meet its existing needs and that the leases can be renewed or replaced on
reasonable terms if necessary.
ITEM 3 - LEGAL PROCEEDINGS
In the normal course of its business operations, the Company is involved in
various claims and other business related disputes. In the opinion of
management, the Company is not a party to any pending litigation the disposition
of which would have a material adverse effect on the Company's business,
financial position or its results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Publicly Traded Securities. The Company's Common Stock and
Warrants are quoted on the over-the-counter bulletin board ("OTC Bulletin
Board"). There were 6,500,000 shares of Common Stock and 971,266 Warrants
outstanding as of March 27, 2001. The high and low price listed for the Common
Stock and Warrants reflects the OTC Bulletin Board closing bid prices since May
28, 1999, the initial trading date of the Company's securities. The closing bid
price on December 31, 2000 was $1.00. There were approximately 298 shareholders
of record on December 31, 2000, representing approximately 1,450 beneficial
owners.
OTC Bulletin Board
Common Stock Warrants
High Low High Low
2000
Fourth Quarter $2.375 $0.813 $0.120 $0.016
Third Quarter 3.125 1.250 0.150 0.020
Second Quarter 3.125 1.625 0.250 0.040
First Quarter 2.875 1.688 0.250 0.040
1999
Fourth Quarter 1.813 1.500 0.250 0.010
Third Quarter 3.375 1.750 0.313 0.188
Second Quarter 3.625 2.000 0.500 0.250
Dividend Policy
The Company does not anticipate declaring or paying cash dividends on its Common
Stock in the foreseeable future. For information concerning statutory
limitations on the payment of dividends to the Company by the Insurance
Subsidiaries and further discussion of the Company's results of operations and
liquidity, see ITEM 7 - "Management's Discussion and Analysis of Results of
Operations and Financial Condition", ITEM 1 - "Business -- Regulation", and NOTE
11 - "Statutory Capital And Surplus" to the Company's Consolidated Financial
Statements at Item 8.
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The information set forth below was derived from the Consolidated Financial
Statements of the Company. The information set forth below should be read in
conjunction with ITEM 7 - "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and the Consolidated Financial Statements of
the Company and related notes.
ASCENT ASSURANCE, INC.
Year Ended Nine Months Ended
December 31, 2000 December 31, 1999 March 31, 1999
----------------- ------------------ ----------------
(in thousands, except per share data)
Statement of Operations Data:
Premiums $ 119,908 $ 86,371
Total revenues 149,586 105,972
(Loss) income before income taxes (12,939) 3,231
Net (loss) income (3) (18,942) 2,106
Preferred stock dividends 2,576 1,874
(Loss) income applicable to common shareholders (21,518) 232
(Loss) Earnings Per Share(3):
Basic $ (3.31) $ 0.04
Diluted $ (3.31) $ 0.04
Weighted Average Shares Outstanding:
Basic 6,500 6,500
Diluted 6,500 6,510
Balance Sheet Data:
Cash and invested assets $ 112,235 $ 115,303 $ 129,142
Total assets 160,478 163,690 169,795
Policy liabilities 104,084 95,895 95,806
Notes payable(1) 8,947 7,162 5,088
Total liabilities 128,698 116,649 119,435
Redeemable convertible preferred stock(2) 27,705 23,257 23,257
Stockholders' equity 4,075 23,784 27,103
Book Value Per Share(3) $ .63 $ 3.66 $ 4.17
(1) In April 2001, the Company borrowed an additional $11,000. See "Liquidity,
Capital Resources, and Statutory Capital and Surplus" at Item 7.
(2) At December 31, 2000, consists of 27,705 shares of New Preferred Stock,
which are convertible, at the option of the holders thereof, into an
aggregate of 5,676,469 shares of New Common Stock at a conversion price of
$4.88 per share of New Common Stock.
(3) Net loss for the year ended December 31, 2000 includes a non-cash charge of
$10.4 million related to an increase in the deferred tax asset valuation
allowance which increased loss per share and decreased book value per share
by $(1.60).
WESTBRIDGE CAPITAL CORP.
Three
Months
Ended
March 31, Year Ended December 31,
---------- -----------------------------------------
1999 1998 1997 1996 (1)
---------- ----------- ----------- -----------
(in thousands, except per share data)
Statement of Operations Data:
Premiums $ 29,948 $ 135,717 $ 161,097 $ 156,780
Total revenues 36,814 166,650 188,904 175,146
Extraordinary loss, net of
income tax - - 1,007 -
Net income (loss) 208 (22,285) (97,144) 8,261
Preferred stock dividends - 520 1,572 1,650
Income (loss) applicable to
common stockholders 208 (22,805) (98,716) 6,611
Earnings (Loss) Per Share:
Basic $ 0.03 $ (3.43) $ (16.07) $ 1.11
Diluted $ 0.03 $ (3.43) $ (16.07) $ 0.97
Weighted Average Shares Outstanding:
Basic 7,032 6,640 6,143 5,978
Diluted 7,032 6,640 6,143 8,477
Balance Sheet Data:
Total cash and invested assets $ 131,708 $ 148,442 $ 103,218
Total assets 169,741 202,856 220,716
Policy liabilities 97,987 107,595 93,390
Notes payable 95,715 102,547 40,560
Total liabilities 219,886 229,274 152,813
Redeemable convertible preferred stock 11,935 19,000 20,000
Stockholders' (deficit) equity (62,080) (45,418) 47,903
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Business Overview. Ascent Assurance, Inc. ("Ascent"), adopted its corporate name
on March 24, 1999, the date its predecessor, Westbridge Capital Corp.
("Westbridge") emerged from Chapter 11 reorganization proceedings. For
additional information regarding the reorganization and adoption of fresh start
accounting, see Notes 2 and 4 to the Consolidated Financial Statements included
at Item 8. References herein to the "Company" shall mean for all periods on or
prior to March 31, 1999, Westbridge and its subsidiaries, and for all periods on
or after the close of business on March 31, 1999, Ascent and its subsidiaries.
The Company's revenues result primarily from premiums and fees from the
insurance products sold by its wholly owned subsidiaries National Foundation
Life Insurance Company ("NFL"), Freedom Life Insurance Company of America
("FLICA"), National Financial Insurance Company ("NFIC") and American Insurance
Company of Texas ("AICT"), and together with NFL, NFIC and FLICA, collectively,
the "Insurance Subsidiaries" and marketed by NationalCare(R) Marketing, Inc.
("NCM"), also a wholly owned subsidiary. To a lesser extent the Company derives
revenue from (i) telemarketing services, (ii) printing services, and (iii)
renewal commissions received by the Company for prior year sales of insurance
products for unaffiliated insurance carriers.
The following discussion provides management's assessment of financial results
and material changes in financial position for the Company. For a better
understanding of this analysis, reference should be made to Item 1 - "Business"
and to Item 8 - "Financial Statements and Supplementary Data". Certain
reclassifications of prior years' amounts have been made to conform with the
2000 presentation.
Forward-Looking Statements. Statements contained in this analysis and elsewhere
in this document that are not based on historical information are
forward-looking statements and are based on management's projections, estimates
and assumptions. Management cautions readers regarding its forward-looking
statements. The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements. Various statements contained in
Item 1 - "Business" and Item 7 - "Management's Discussion and Analysis of
Results of Operation and Financial Condition", are forward-looking statements.
These forward-looking statements are based on the intent, belief or current
expectations of the Company and members of its senior management team. While the
Company believes that its expectations are based on reasonable assumptions
within the bounds of its knowledge of its business and operations, prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance, and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors known to management that could
cause actual results to differ materially from those contemplated by the
forward-looking statements in this Report include, but are not limited to:
|X| further adverse claims experience or other events adversely impacting the
Company's liquidity position,
|X| actions that may be taken by insurance regulatory authorities, |X| adverse
developments in the timing or results of the Company's current
strategic business plan to return operations to profitability by improving
claims experience and reducing overhead expenses,
|X| the loss of key personnel,
|X| and the effect of changing economic and market conditions, especially
medical expense inflation and health care reform initiatives.
Subsequent written or oral statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the cautionary
statements in this Report and those in the Company's reports previously filed
with the SEC. Copies of these filings may be obtained by contacting the Company
or the SEC.
OPERATING RESULTS
Results of operations for Ascent are reported for 2000 and on a pro forma basis
as if Ascent and Westbridge adopted fresh start accounting on January 1, 1999
and operated as a single entity for the year ended December 31, 1999. The
operating results for 2000 and 1999 are compared to Westbridge's results of
operations for the corresponding period in 1998. (In thousands except insurance
operating ratios.)
Pro Forma
Ascent Ascent Westbridge
----------- ----------- -----------
2000 1999 1998
----------- ----------- -----------
Premiums $ 119,908 $ 116,319 $ 135,717
Other 3,335 1,789 589
----------- ----------- -----------
Total insurance operating revenue 123,243 118,108 136,306
Benefits and claims 101,940 87,498 99,419
Commissions 17,969 16,264 22,692
(Increase) decrease in deferred acquisition costs (6,818) (5,216) 40
Recognition of premium deficiency 1,500 - 4,948
General and administrative expense 28,284 23,345 24,668
Taxes, licenses and fees 4,540 4,481 5,216
----------- ----------- -----------
Total insurance operating expenses 147,415 126,372 156,983
----------- ----------- -----------
Insurance operating results (24,172) (8,264) (20,677)
----------- ----------- -----------
Fee and service income 17,056 15,543 16,191
Fee and service expenses 14,481 13,233 15,728
----------- ----------- -----------
Fee and service results 2,575 2,310 463
----------- ----------- -----------
Net investment income 9,741 9,302 12,011
Net realized (loss) gain on investments (454) (167) 2,142
Interest expense on notes payable (629) (403) (881)
Interest expense on retired/canceled debt - - (5,933)
Resolution of pre-confirmation contingencies - 1,235 -
Reorganization expenses - - (9,179)
----------- ----------- -----------
(Loss) income before income taxes (12,939) 4,013 (22,054)
Income tax benefit (expense) (6,003) (1,364) (231)
----------- ----------- -----------
Net (loss) income $ (18,942) $ 2,649 $ (22,285)
=========== =========== ===========
Insurance operating ratios*
Benefits and claims 85.0% 75.2% 73.3%
Commissions 15.0% 14.0% 16.7%
Increase in deferred acquisition costs (5.7%) (4.5%) -
Recognition of premium deficiency 1.3% - 3.6%
General and administrative expense 22.9% 19.8% 18.1%
Taxes, licenses and fees 3.8% 3.9% 3.8%
*Ratios are calculated as a percent of premium with the exception of the general
and administrative expense ratio which is calculated as a percent of total
insurance operating revenue.
Overview. For the year ended December 31, 2000, the loss before income taxes was
$(12.9) million compared to income before income taxes of $4.0 million for 1999
and a loss before income taxes of $(22.1) million for 1998. The pre-tax
operating loss for 2000 was attributable to losses from the Group Preferred
Provider Organization ("GPPO") product, the principal major medical product
marketed by FLICA from 1998 to July 2000 which represented 32% of premium
revenue for 2000. Such pre-tax loss includes a non-cash premium deficiency
charge of $(1.5) million. As discussed below, losses from the GPPO product were
principally driven by higher than expected claims frequency. Management believes
that significant rate increase actions will reduce losses from the GPPO product
in 2001. Due to losses from the GPPO product, FLICA has required significant
capital contributions during 2000 and 2001 to comply with statutory capital and
surplus requirements. Continued adverse claims experience for the GPPO product
could have a material adverse impact on FLICA's ability to meet minimum
statutory capital and surplus requirements and maintain its new business
production at current levels (see "Liquidity, Capital Resources and Statutory
Capital and Surplus" and Item 1 - Business, "Regulation").
In July 2000, the Company began marketing a new major medical policy in all
significant marketing regions. The new major medical policy is designed to
produce a substantially lower benefits and claims to premium ratio than the old
GPPO product. Management believes that the new major medical policy has been
well accepted by the Company's career agency force. At March 31, 2001,
annualized premiums in force for the new major medical policy were $13.8
million.
As a result of the fourth quarter losses from the old GPPO product, the Company
has reported a cumulative pre-tax loss since the fresh start date of March 31,
1999. Principally as a result of this cumulative pre-tax loss position,
generally accepted accounting principles ("GAAP") require that a valuation
allowance be provided for any net deferred tax asset. Accordingly, an additional
deferred tax asset valuation allowance of $10.4 million was established at
December 31, 2000 which resulted in the Company reporting income tax expense of
$6 million for the year ended December 31, 2000 (see below and Note 11-"Income
Taxes" to the Company's Consolidated Financial Statements at Item 8.) This
adjustment had no impact on the Company's cash position at December 31, 2000 and
did not impact statutory capital and surplus of the Insurance Subsidiaries.
In comparing 1999 to 1998, operating results for 1998 were adversely impacted by
premium deficiency charges of $4.9 million, reorganization expenses of $9.2
million and interest expense on retired / canceled debt of $5.9 million.
The following narratives discuss the principal components of insurance operating
results.
Premiums. The Insurance Subsidiaries' premium revenue is derived principally
from the following medical expense reimbursement products: major medical,
supplemental specified disease and Medicare supplement. Major medical products
are generally designed to reimburse insureds for eligible expenses incurred for
hospital confinement, surgical expenses, physician services, outpatient services
and the cost of medicines. Supplemental specified disease products include
indemnity policies for hospital confinement and convalescent care for treatment
of specified diseases and "event specific" policies, which provide fixed
benefits or lump sum payments upon diagnoses of certain types of internal cancer
or other catastrophic diseases. Prior to 1998, the Insurance Subsidiaries also
underwrote Medicare supplement products and continue to receive renewal premiums
from such policies. Premium revenue, in thousands, for each major product line
is set forth below:
Pro Forma
Ascent Ascent Westbridge
----------- ----------- -----------
2000 1999 1998
----------- ----------- -----------
Major medical:
First-year $ 28,082 $ 15,863 $ 15,821
Renewal 37,632 39,891 48,888
----------- ----------- -----------
65,714 55,754 64,709
----------- ----------- -----------
Supplemental specified disease:
First-year 1,394 1,352 1,818
Renewal 26,287 27,917 30,546
----------- ----------- -----------
27,681 29,269 32,364
----------- ----------- -----------
Medicare supplement:
First-year - 34 1,477
Renewal 23,927 30,526 36,554
----------- ----------- -----------
23,927 30,560 38,031
----------- ----------- -----------
Other 2,586 736 613
----------- ----------- -----------
Consolidated Premium Revenue $ 119,908 $ 116,319 $ 135,717
=========== =========== ===========
Total premiums increased by $3.6 million, or 3.1%, for 2000 as compared to 1999
as new business production exceeded the expected decline in renewal premiums
from older, closed blocks of business. Major medical products comprised 95% of
new business sales for 2000 and represented 55% of consolidated premium revenue
for 2000 as compared to 48% for 1999 and 1998. Premiums related to the old GPPO
major medical product were $38.2 million, $17.5 million and $3.2 million for
2000, 1999 and 1998, respectively. The Company began implementing significant
rate increases on the old GPPO product in July 2000 and anticipates implementing
additional significant rate increases in 2001.
For 2000, approximately 88% of new business was underwritten by FLICA. Continued
adverse claims experience for the old GPPO product could have a material adverse
impact on FLICA's ability to meet minimum statutory capital and surplus
requirements and maintain its new business production at current levels (see
"Liquidity, Capital Resources and Statutory Capital and Surplus" and Item 1 -
Business, "Regulation").
For 1999, premiums decreased $19.4 million, or 14.3%, from 1998 due to the
discontinuance of the sale of the Medicare supplement product line, the
cancellation of blocks of business and decreased persistency from the
implementation of premium rate increases.
Benefits and Claims. Benefits and claims are comprised of (1) claims paid, (2)
changes in claim reserves for claims incurred (whether or not reported), and (3)
changes in future policy benefit reserves. The ratio of consolidated benefits
and claims to consolidated premiums increased to 85.0% for 2000, a 9.8
percentage point increase as compared to 1999. This increase in the benefits and
claim ratio increased consolidated pre-tax losses for 2000 by $11.8 million for
2000. In the fourth quarter of 2000, claims payments exceeded historical levels
due to full implementation of the Company's new claims data processing system
which was converted to in May 2000. As a result, the pending claims inventory
was significantly reduced at December 31, 2000 and the Company determined that
the benefits and claim ratio for the old GPPO product was substantially higher
than expected. Adverse claims experience for the old GPPO product was due
primarily to higher than expected claims frequency, particularly for young women
and children. The increase in expected benefits and claim ratio for the old GPPO
product resulted in a consolidated claims and benefit ratio for the fourth
quarter of 2000 of 99.8% (see "Financial Condition - Claims Reserves").
Continued adverse claims experience for the old GPPO product could have a
material adverse impact on FLICA's ability to meet minimum statutory capital and
surplus requirements (see "Liquidity, Capital Resources and Statutory Capital
and Surplus").
For 1999, the 1.9 percentage point increase in the ratio of benefits to premium
in comparison to 1998 was principally attributable to unfavorable experience in
the major medical line of business partially offset by favorable experience in
the Medicare supplement line of business.
Commissions. For 2000, the commissions to premium ratio increased from 1999 by
1.0 percentage point as a result of the increase in the amount of new major
medical premiums and change in business mix. Commissions as a percent of premium
decreased for 1999 as compared to 1998 principally due to declining ultimate
commission rates on closed blocks of business and the lower commission rate
structure implemented in the conversion from a fragmented general agency
marketing operation to a single career agency force in mid-1998.
General and administrative expense. General and administrative expense for 2000
increased over 1999 principally due to increased new business production and
non-recurring expenses related to the implementation in May, 2000 of the
Company's new policy administration and claims data processing systems.
Recognition of premium deficiency. In general, a premium deficiency exists if
the present value of future cash flows plus future policy benefit and claim
reserves at the calculation date is negative or less than net deferred policy
acquisition costs. The calculation of future cash flows includes assumptions as
to future rate increases and persistency. The Company routinely evaluates the
recoverability of deferred acquisition costs in accordance with GAAP. As a
result of fourth quarter losses for the old GPPO product, the Company determined
that a premium deficiency of $1.5 million existed at December 31, 2000 related
to medical expense reimbursement products issued subsequent to the fresh start
date of March 31, 1999. Accordingly, deferred policy acquisition costs were
reduced by $1.5 million at December 31, 2000.
Net Investment Income. Net investment income increased $0.4 million, or 4.7%,
for 2000 as compared to 1999 due to an increase in interest income relative to
agent balance receivables. For 1999, net investment income decreased $2.7
million, or 22.6%, from 1998 due to 16.2% decrease in invested assets and
decreased interest income from agent balance receivables. Invested assets
decreased as a result of payments of reorganization costs and reduction of
premiums received as a result of the elimination of unprofitable blocks of
business.
FINANCIAL CONDITION
Investments. Investment income is an important source of revenue, and the
Company's return on invested assets has a material effect on net income. The
Company's investment policy is subject to the requirements of regulatory
authorities. In addition, certain assets are held on deposit in specified states
and invested in specified securities in order to comply with state law. Although
the Company closely monitors its investment portfolio, available yields on
newly-invested funds and gains or losses on existing investments depend
primarily on general market conditions. The Company's investment portfolio is
managed by Conseco Capital Management, Inc., a registered investment advisor.
Investment policy is determined by the Board of Directors of the Company and
each of the Insurance Subsidiaries. The Company's current investment policy is
to balance its portfolio between long-term and short-term investments so as to
achieve long-term returns consistent with the preservation of capital and
maintenance of adequate liquidity to meet the payment of the Company's policy
benefits and claims. The current schedule of the Company's invested asset
maturities corresponds with the Company's expectations regarding anticipated
cash flow payments based on the Company's policy benefit and claim cycle, which
the Company believes is medium term in nature. The Company invests primarily in
fixed-income securities of the U.S. Government and its related agencies,
investment grade fixed-income corporate securities and mortgage-backed
securities. Also, up to 5% of the Company's fixed maturity securities may be
invested in higher yielding, non-investment grade securities.
The following table provides information on the Company's cash and invested
assets, in thousands, as of December 31:
Ascent Assurance
------------------------------
2000 1999
------------- -------------
Cash and cash equivalents $ 2,658 $ 5,110
------------- -------------
Fixed Maturities (at market value):
U.S. Government and related agencies 10,462 10,688
State, county and municipal 1,982 1,867
Finance 23,445 23,950
Public utilities 6,787 9,128
Mortgage-backed 13,302 7,725
All other corporate bonds 44,612 44,205
------------- -------------
Total Fixed Maturities 100,590 97,563
------------- -------------
Preferred stock 1,335 1,313
Other Invested Assets:
Mortgage loans on real estate 56 124
Policy loans 342 289
Short-term investments and certificates of deposit 7,254 10,904
------------- -------------
Total Other Invested Assets 7,652 11,317
------------- -------------
Total Cash and Invested Assets $ 112,235 $ 115,303
============= =============
The following table summarizes consolidated investment results (excluding
unrealized gains or losses) for the indicated year:
Pro Forma
Ascent Ascent Westbridge
---------- ---------- ----------
2000 1999 1998
---------- ---------- ----------
Net investment income (1) $ 7,805 $ 8,016 $ 9,500
Net realized (loss) gain on investments (454) (167) 2,142
Average gross annual yield on fixed maturities 7.2% 7.2% 7.0%
The following table indicates by rating the composition of the Company's fixed
maturity securities portfolio, excluding short-term investments and certificates
of deposit, at December 31, 2000:
Market
Value %
-------------- ------------
(in thousands)
Ratings (1)
Investment grade:
U.S. Government and agencies $ 22,754 22.6
AAA 2,885 2.9
AA 8,305 8.3
A 38,552 38.3
BBB 27,168 27.0
Non-Investment grade:
BB 674 0.7
B and below 252 0.2
------------ ------------
Total fixed maturity securities $ 100,590 100.0
============ ============
(1) Ratings are the lower of those assigned primarily by Standard & Poor's and
Moody's, when available, and are shown in the table using the Standard &
Poor's rating scale. Unrated securities are assigned ratings based on the
applicable NAIC designation or the rating assigned to comparable debt
outstanding of the same issuer. NAIC 1 fixed maturity securities have been
classified as "A" and NAIC 2 fixed maturity securities have been classified
as "BBB".
The NAIC assigns securities quality ratings and uniform prices called "NAIC
Designations," which are used by insurers when preparing their annual statutory
reports. The NAIC assigns designations to publicly-traded as well as
privately-placed securities. The ratings assigned by the NAIC range from Class 1
(highest quality rating) to Class 6 (lowest quality rating). At December 31,
2000, 70.4%, 27.0% and 2.6% of the market value of the Company's fixed maturity
securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.
The scheduled contractual maturities of the Company's fixed maturity securities,
excluding short-term investments and certificates of deposit, at December 31 are
shown in the table below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
2000 1999
------------------------- -------------------------
Market Market
Value % Value %
------------ ----------- ------------ -----------
Scheduled Maturity (in thousands)
- - ------------------
Due in one year or less $ 7,073 7.0 $ 4,012 4.1
Due after one year through five years 28,877 28.7 33,311 34.2
Due after five years through ten years 26,327 26.2 26,367 27.0
Due after ten years 25,011 24.9 26,148 26.8
Mortgage-backed securities 13,302 13.2 7,725 7.9
------------ ----------- ------------ -----------
Total fixed maturity securities $ 100,590 100.0 $ 97,563 100.0
============ =========== ============ ===========
Deferred Tax Asset. As of December 31, 2000, the Company has reported cumulative
pre-tax losses since the fresh start date of March 31, 1999. Realization of the
Company's deferred tax asset is dependent upon the return of the Company's
operations to profitability. Pre-tax losses during 2000 were principally
attributable to adverse claims experience for the old GPPO major medical
product. Management believes that the GPPO product losses can be reduced through
rate increase management. However, under applicable GAAP literature, projections
of future profitability are significantly discounted when evaluating the
recoverability of deferred tax assets and do not overcome the negative evidence
of cumulative losses. Accordingly, the Company increased its deferred tax
valuation allowance by $10.4 million to $18.3 million to fully reserve the
remaining net deferred tax asset as of December 31, 2000. Applicable GAAP
literature further provides that the deferred tax asset valuation allowance may
be eliminated once the Company is no longer in a cumulative loss position, as
defined.
Claims Reserves. Claim reserves are established by the Company for benefit
payments which have already been incurred by the policyholder but which have not
been paid by the Company. Claim reserves totaled $42.7 million at December 31,
2000 as compared to $38.8 million at December 31, 1999. The process of
estimating claim reserves involves the active participation of experienced
actuarial consultants with input from the underwriting, claims, and finance
departments. The inherent uncertainty in estimating claim reserves is increased
when significant changes occur. Examples of such changes include: (1) changes in
economic conditions; (2) changes in state or federal laws and regulations,
particularly insurance reform measures; (3) changes in production sources for
existing lines of business; (4) writings of significant blocks of new business
and (5) significant changes in claims payment patterns. As a result of the
implementation of a new claims administration system in May 2000, the Company's
claims payment pattern accelerated in the fourth quarter of 2000 which resulted
in a significant reduction in pending claims inventory at December 31, 2000.
This significant change in the claims payment pattern has greatly increased the
inherent uncertainty in estimating claim reserves at December 31, 2000. Because
claim reserves are estimates, management monitors reserve adequacy over time,
evaluating new information as it becomes available and adjusting claim reserves
as necessary. Such adjustments are reflected in current operations.
Management considers many factors when setting reserves including: (1)
historical trends; (2) current legal interpretations of coverage and liability;
(3) loss payments and pending levels of unpaid claims; and (4) product mix.
Based on these considerations, management believes that adequate provision has
been made for the Company's claim reserves. Actual claims paid may deviate,
perhaps substantially, from such reserves.
Future Policy Benefit Reserves. Policy benefit reserves are established by the
Company for benefit payments that have not been incurred but which are estimated
to be incurred in the future. The policy benefit reserves are calculated
according to the net level premium reserve method and are equal to the
discounted present value of the Company's expected future policyholder benefits
minus the discounted present value of its expected future net premiums. These
present value determinations are based upon assumed fixed investment yields, the
age of the insured(s) at the time of policy issuance, expected morbidity and
persistency rates, and expected future policyholder benefits. Except for
purposes of reporting to insurance regulatory authorities and for tax filing,
the Company's claim reserves and policy benefit reserves are determined in
accordance with GAAP.
In determining the morbidity, persistency rate, claim cost and other assumptions
used in determining the Company's policy benefit reserves, the Company relies
primarily upon its own benefit payment history and upon information developed in
conjunction with actuarial consultants and industry data. The Company's
persistency rates have a direct impact upon its policy benefit reserves because
the determinations for this reserve are, in part, a function of the number of
policies in force and expected to remain in force to maturity. If persistency is
higher or lower than expected, future policyholder benefits will also be higher
or lower because of the different than expected number of policies in force, and
the policy benefit reserves will be increased or decreased accordingly.
The Company's policy benefit reserve requirements are also interrelated with
product pricing and profitability. The Company must price its products at a
level sufficient to fund its policyholder benefits and still remain profitable.
Because the Company's claim and policyholder benefits represent the single
largest category of its operating expenses, inaccuracies in the assumptions used
to estimate the amount of such benefits can result in the Company failing to
price its products appropriately and to generate sufficient premiums to fund the
payment thereof. The sharp increase in claim loss ratios experienced by the
Company during 2000 was indicative of inadequate pricing in the Company's
principal major medical product marketed through June 2000.
Because the discount factor used in calculating the Company's policy benefit
reserves is based upon the rate of return of the Company's investments designed
to fund this reserve, the amount of the reserve is dependent upon the yield on
these investments. Provided that there is no material adverse experience with
respect to these benefits, changes in future market interest rates will not have
an impact on the profitability of policies already sold. Because fluctuations in
future market interest rates affect the Company's yield on new investments, they
also affect the discount factor used to establish, and thus the amount of, its
policy benefit reserves for new sales. In addition, because an increase in the
policy benefit reserves in any period is treated as an expense for income
statement purposes, market interest rate fluctuations can directly affect the
Company's profitability for policies sold in such period. It is not possible to
predict future market interest rate fluctuations.
In accordance with GAAP, the Company's actuarial assumptions are generally
fixed, and absent materially adverse benefit experience, they are not generally
adjusted. The Company monitors the adequacy of its policy benefit reserves on an
ongoing basis by periodically analyzing the accuracy of its actuarial
assumptions. The adequacy of the Company's policy benefit reserves may also be
impacted by the development of new medicines and treatment procedures which may
alter the incidence rates of illness and the treatment methods for illness and
accident (such as out-patient versus in-patient care) or prolong life
expectancy. Changes in coverage provided by major medical insurers or government
plans may also affect the adequacy of the Company's reserves if, for example,
such developments had the effect of increasing or decreasing the incidence rate
and per claim costs of occurrences against which the Company insures. An
increase in either the incidence rate or the per claim costs of such occurrences
could result in the Company needing to post additional reserves, which could
have a material adverse effect upon its business, financial condition or results
of operations (see "Liquidity, Capital Resources and Statutory Capital and
Surplus").
Reinsurance. As is customary in the insurance industry, the Company's Insurance
Subsidiaries reinsure, or cede, portions of the coverage provided to
policyholders to other insurance companies on both an excess of loss and a
coinsurance basis. Cession of reinsurance is utilized by an insurer to limit its
maximum loss thereby providing a greater diversification of risk and minimizing
exposures on larger risks. Reinsurance does not discharge the primary liability
of the original insurer with respect to such insurance, but the Company, in
accordance with prevailing insurance industry practice, reports reserves and
claims after adjustment for reserves and claims ceded to other companies through
reinsurance.
The Company reinsures its risks under its major medical policies on an excess of
loss basis so that its net payments on any one life insured under the policy are
limited for any one calendar year to $100,000. Risks under its Medicare
Supplement policies are not reinsured. The Company's risks under its Accidental
Death policies are one hundred percent (100%) reinsured. Under its life
insurance reinsurance agreement, FLICA and NFL retains fifty percent (50%) of
the coverage amount of each of its life insurance policies in force up to a
maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty,
a closed block of annually renewable term life insurance policies. NFL's
retention limit is $25,000 per year. In accordance with industry practice, the
reinsurance arrangements in force with respect to these policies are terminable
by either party with respect to claims incurred after the termination and
expiration dates.
At December 31, 2000, $1.5 million of the $2.5 million recoverable from
reinsurers related to paid losses. Of this balance, all was recoverable from
reinsurers rated "A" or higher by the A.M. Best Company.
Statutory Accounting Practices. The Company's Insurance Subsidiaries are
required to report their results of operations and financial position to state
regulatory agencies based upon statutory accounting practices ("SAP"). Under
SAP, certain assumptions used in determining the policy benefit reserves, such
as claim costs and investment return assumptions, are often more conservative
than those appropriate for use by the Company under GAAP. In particular, SAP
interest rate assumptions for investment results are fixed by statute and are
generally lower than those used by the Company under GAAP. Another significant
difference is that under SAP, unlike GAAP, the Company is required to expense
all sales and other policy acquisition costs as they are incurred rather than
capitalizing and amortizing them over the expected life of the policy. The
effect of this requirement is moderated by the allowance under SAP of an
accounting treatment known as the "two year preliminary term" reserve valuation
method. This reserve method allows the Company to defer any accumulation of
policy benefit reserves until after the second policy year. The immediate charge
off of sales and acquisition expenses and the sometimes conservative claim cost
and other valuation assumptions under SAP generally cause a lag between the sale
of a policy and the emergence of reported earnings. Because this lag can reduce
the Company's gain from operations on a SAP basis, it can have the effect of
reducing the amount of funds available for dividend distributions from the
Insurance Subsidiaries (see "Liquidity, Capital Resources and Statutory Capital
and Surplus").
LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS
Ascent. Ascent's principal assets consist of the capital stock of its
subsidiaries and invested assets. Accordingly, Ascent's principal sources of
funds are comprised of dividends and advances from non-insurance subsidiaries.
The Company's principal uses of cash are for capital contributions to its
Insurance Subsidiaries and general and administrative expenses. The Company
funded capital contributions totaling approximately $8.15 million, $5.9 million
and $5.7 million to its Insurance Subsidiaries in 2000, 1999 and 1998
respectively. As of December 31, 2000, Ascent had approximately $4.3 million in
unrestricted cash and invested assets. In February 2001, Ascent contributed
$4.25 million to FLICA.
During the first quarter of 2001, the Company determined that continued adverse
claims experience for the old GPPO product (see "Operating Results") would
require Ascent to make capital contributions to FLICA in excess of those
originally planned. Ascent obtained debt financing (see below) and contributed
an additional $11 million to FLICA in April 2001 to enable FLICA to maintain an
RBC Ratio greater than Company Action Level at March 31, 2001 and to comply with
the Florida premium writing ratio regulation (see "Business- Regulation" at Item
1). If the adverse claims experience for the old GPPO product exceeds
management's current estimates, Ascent would be required to make additional
capital contributions to FLICA in excess of those currently projected for 2001.
Additional financing would be required by Ascent in order to make any such
"excess" contributions. As a result, continued adverse claims experience for the
old GPPO product or for other products written by the Insurance Subsidiaries
could have a material adverse effect on Ascent's liquidity and capital resources
and, due to potential restrictions on the ability of FLICA to underwrite new
policies, its results of operations.
Ascent received debt financing for the $11 million capital contribution
described above from a loan made by Credit Suisse First Boston Management
Corporation, which is an affiliate of Special Situations Holdings, Inc. --
Westbridge (Ascent's largest stockholder). The credit agreement relating to that
loan provided Ascent with total loan commitments of $11 million (all of which
has been drawn). The loan bears interest at a rate of 12% per annum and matures
in April, 2004. Absent any acceleration following an event of default, the
Company may elect to pay interest in kind by issuance of additional notes. The
credit agreement relating to the loan provides for a facility fee of $1.5
million which is payable upon maturity or upon a change in control, as defined.
Ascent's obligations are secured, pursuant to a guarantee and security agreement
and pledge agreements, by substantially all of the assets of Ascent and its
subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL,
NFIC, NCM, Ascent Funding Corporation and Ascent Management, Inc., some or all
of which is pledged as collateral for receivables financing described below).
Ascent's subsidiaries (other than those listed above) have also guaranteed
Ascent's obligations under the credit agreement and the loan. Continued adverse
claims experience for the old GPPO product could result in events of default
under the credit agreement and related agreements.
Dividends on Ascent's redeemable convertible preferred stock may be paid in cash
or by issuance of additional shares of preferred stock, at the Company's option.
In December 2000, the Company paid preferred stock dividends through the
issuance of 2,575 additional shares of preferred stock. Preferred stock
dividends accrued at December 31, 1999 were paid in January 2000 through
issuance of 1,873 additional shares of preferred stock.
Insurance Subsidiaries. The primary source of cash for the Insurance
Subsidiaries are premiums, sales and maturity of invested assets and investment
income while the primary uses of cash are benefits and claims, commissions,
general and administrative expenses and taxes, licenses and fees. Cash
contributions of $8.15 million and $15.25 million were funded in 2000 and
through April 2001, respectively, by Ascent to its Insurance Subsidiaries to
maintain capital and surplus (see "Ascent" discussion above). The Company's
Insurance Subsidiaries have recorded combined statutory losses of $17.0 million
for 2000 as compared to $6.5 million for 1999. The increased statutory losses
resulted from 1) higher than expected claims and benefits for the old GPPO major
medical product (see "Operating Results") and 2) costs associated with increased
new business production which must be expensed under statutory accounting (for
GAAP, such costs are deferred and amortized as related premiums are recorded).
Dividends paid by the Company's Insurance Subsidiaries are determined by and
subject to the regulations of the insurance laws and practices of the insurance
department of the state of domicile ("Business - Regulations" at Item 1). The
Insurance Subsidiaries are precluded from paying dividends during 2001 without
the prior approval of the Texas Insurance Commissioner as the Companies' earned
surplus is negative.
Inflation will affect claim costs on the Company's Medicare supplement and major
medical products. Costs associated with a hospital stay and the amounts
reimbursed by the Medicare program are each determined, in part, based on the
rate of inflation. If hospital and other medical costs that are reimbursed by
the Medicare program increase, claim costs on the Medicare supplement products
will increase. Similarly, as the hospital and other medical costs increase,
claim costs on the major medical products will increase. The Company has
somewhat mitigated its exposure to inflation by incorporating certain
limitations on the maximum benefits which may be paid under its policies and by
filing for premium rate increases as necessary.
Consolidated. The Company's consolidated net cash used for operations totaled
$4.9 million, $2.6 million and $8.0 million for the years ended December 31,
2000, 1999 and 1998, respectively. The increase in cash used for operations in
2000 as compared to 1999 is primarily due to an increase in the cash basis ratio
of benefits and claims to premiums and increases in general expenses relative to
the implementation of the Company's policy administration and claims data
processing systems. The decrease in cash used for operations in 1999 from 1998
was primarily due to a decrease in the cash basis ratio of benefits and claims
and expenses to premiums, and a reduction in reorganization costs paid.
Net cash provided by investing activities for the years ended December 31, 2000,
1999 and 1998 totaled $0.6 million, $6.4 million and $13.3 million,
respectively. Net cash provided by investing activities in 1999 and 1998 was
primarily used to fund the Company's operating and financing activities.
Net cash provided by (used for) financing activities totaled $1.8 million, $1.0
million and $(6.0) million for the years ended December 31, 2000, 1999 and 1998,
respectively. Financing activities during 2000 include $2.9 million in
borrowings and $0.6 million in repayments related to the Company's Receivables
Financing Program (defined below), and $0.5 million in repayments related to the
term loan facility. Financing activities during 1999 include $3.3 million in
borrowings on the term loan facility, and $0.8 million in borrowings and $3.2
million in repayments related to the Company's Receivables Financing Program.
Cash flows for financing activities for 1998 were related to the net borrowings
and repayments associated with the Company's Receivables Financing program. The
Company's net financing cash flow increased in 2000 and 1999 as a result of
increasing new business production and related agent's balances.
In the ordinary course of business, the Company advances commissions on policies
written by its general agencies and their agents. The Company is reimbursed for
these advances from the commissions earned over the respective policy's life. In
the event that policies lapse prior to the time the Company has been fully
reimbursed, the general agency or the individual agents, as the case may be, are
responsible for reimbursing the Company for the outstanding balance of the
commission advance. As of December 31, 2000 and 1999, the Company's allowance
for uncollectable commission advances was $3.7 million and $6.1 million,
respectively.
The Company finances the majority of its obligations to make commission advances
through Ascent Funding Corporation ("AFI"), an indirect wholly owned subsidiary
of Ascent. AFI has entered into a Credit Agreement (the "Credit Agreement") with
LaSalle Bank, NA ("LaSalle") which currently provides AFI with a $7.5 million
revolving loan facility (the "Receivables Financing"), the proceeds of which are
used to purchase agent advance receivables from FLICA and NFL and certain
affiliated marketing companies. Effective September 30, 2000, the Credit
Agreement was amended to extend the termination date to June 5, 2002, at which
time the outstanding principal and interest will be due and payable. In
connection with this commission advancing program, at December 31, 2000, AFI's
net receivables from subagents totaled approximately $8.7 million with
approximately $6.2 million outstanding under the Credit Agreement.
AFI's obligations under the Credit Agreement are secured by liens upon
substantially all of AFI's assets. The Company has guaranteed AFI's obligations
under the Credit Agreement, and has pledged all of the issued and outstanding
shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that
guaranty (the "Guaranty Agreement"). As of April 17, 2001, there were no events
of default under the Credit or Guaranty Agreements. However, continued adverse
claims experience for the old GPPO major medical product could result in events
of default under the Guaranty Agreement, Credit Agreement and term loan facility
discussed below.
In July 1999, Ascent Management, Inc. ("AMI") received a $3.3 million term loan
facility with LaSalle, proceeds of which were used to fund system replacement
costs. Advances under the term loan facility are secured by substantially all of
AMI's assets and the Guaranty Agreement. Under the terms of the loan, principal
is payable in 60 equal monthly installments beginning January 31, 2000. At
December 31, 2000, approximately $2.8 million was outstanding under the term
loan facility.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary objectives in managing its cash flows and investments are
to maximize investment income and yield while preserving capital and minimizing
credit risks. To attain these objectives, investment policies and strategies are
developed using expected underwriting results, forecasted federal tax positions,
regulatory requirements, forecasted economic conditions including expected
fluctuations in interest rates and general market risks.
Market risk represents the potential for loss due to adverse changes in the fair
market value of financial instruments. The market risks associated with the
financial instruments of the Company primarily relate to the Company's
investment portfolio that consists largely (91.8%) of fixed income securities.
The Company's investment portfolio is exposed to market risk through
fluctuations in interest rates, changes in credit quality and principal
prepayments.
Interest Rate Risk. Interest rate risk is the price sensitivity of a fixed
income security to changes in interest rates. The Company evaluates the
potential changes in interest rates and market prices within the context of
asset and liability management. Asset and liability management involves
forecasting the payout pattern of the Company's liabilities, consisting
primarily of accident and health claim reserves, to determine duration and then
matching the duration of the liabilities to fixed income investments with a
similar duration. Through active portfolio asset and liability management, the
Company believes that interest rate risk is mitigated.
Credit Risk. The company invests primarily in fixed-income securities of the
U.S. Government and its related agencies, investment grade fixed-income
corporate securities and mortgage-backed securities. (See Item 7 - "Management's
Discussion and Analysis of Results of Operations and Financial Conditions" and
Note 4 - "Investments" to the Company's Consolidated Financial Statements.)
Approximately 0.9% of the Company's fixed-income portfolio market value is
comprised of less than investment grade securities. The Company's investment
policy allows up to 5% of the Company's fixed maturity securities to be invested
in higher yielding, non-investment grade securities. Due to the overall high
quality of the Company's investment portfolio ("A" as rated by Standard &
Poor's), management believes the Company has marginal risk with regard to credit
quality.
PrePayment Risk. Mortgage-backed securities investors are compensated primarily
for prepayment risk rather than credit quality risk. During periods of
significant interest rate volatility, the underlying mortgages may repay more
quickly or more slowly than anticipated. If the repayment of principal occurs
earlier than anticipated during periods of declining interest rates, investment
income may decline due to the reinvestment of these funds at the lower current
market rates. To manage prepayment risk, the Company limits the type of
mortgage-backed structures invested in and restricts the portfolio's total
exposure in mortgage-backed securities. If the repayment occurs later than
expected during periods of increasing interest rates, the cost of funds to pay
liabilities may increase due to the mismatching of assets and liabilities.
Sensitivity Analysis. The Company regularly conducts various analyses to gauge
the financial impact of changes in interest rate on its financial condition. The
ranges selected in these analyses reflect management's assessment as being
reasonably possible over the succeeding twelve-month period. The magnitude of
changes modeled in the accompanying analyses should, in no manner, be construed
as a prediction of future economic events, but rather, be treated as a simple
illustration of the potential impact of such events on the Company's financial
results.
The sensitivity analysis of interest rate risk assumes an instantaneous shift in
a parallel fashion across the yield curve, with scenarios of interest rates
increasing and decreasing 100 and 200 basis points from their levels at December
31, 2000, and with all other variables held constant. A 100 and 200 basis point
increase in market interest rates would result in a pre-tax decrease in the
market value of the Company's fixed income investments of $4.4 million and $8.5
million, respectively. Similarly, a 100 and 200 basis point decrease in market
interest rates would result in a pre-tax increase in the market value of the
Company's fixed income investments of $4.6 million and $9.5 million,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Financial Statement Schedules Covered by the
Following Report of Independent Accountants.
Page
Number(s)
Reports of Independent Accountants 27-28
Financial Statements:
Ascent Assurance, Inc. Consolidated Balance Sheets at December 31, 2000 and 1999 29
Ascent Assurance, Inc. Consolidated Statements of Operations for the Year
Ended December 31, 2000 and the Nine Months Ended December 31, 1999 30
Westbridge Capital Corp. Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and the Year Ended December 31, 1998 31
Ascent Assurance, Inc. Consolidated Statements of Comprehensive Income for the
Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 32
Westbridge Capital Corp. Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 33
Ascent Assurance, Inc. Consolidated Statements of Changes in Stockholders' Equity for
the Year Ended December 31, 2000 and the Nine Months Ended December 31, 1999 34
Westbridge Capital Corp. Consolidated Statements of Changes in Stockholders' Equity for
the Three Months Ended March 31, 1999 and the Year Ended December 31, 1998 35
Ascent Assurance, Inc. Consolidated Statements of Cash Flows for the Year Ended
December 31, 2000 and the Nine Months Ended December 31, 1999 36
Westbridge Capital Corp. Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and the Year Ended December 31, 1998 37
Notes to the Consolidated Financial Statements 38-60
Financial Statement Schedules:
II. Condensed Financial Information of Registrant 61-69
III. Supplementary Insurance Information 70
IV. Reinsurance 71
V. Valuation and Qualifying Accounts and Reserves 72
All other Financial Statement Schedules are omitted because they are not
applicable or the required information is shown in the Financial Statements or
notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Ascent Assurance, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Ascent
Assurance, Inc. and its subsidiaries at December 31, 2000 and December 31, 1999,
and the results of their operations and their cash flows for the year ended
December 31, 2000 and nine months ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Dallas, TX
April 17, 2001
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Westbridge Capital Corp. (now, Ascent Assurance, Inc.)
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the results of operations and
cash flows of Westbridge Capital Corp. and its subsidiaries for the three months
ended March 31, 1999 and for the year ended December 31, 1998, in conformity
with accounting principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedules listed in the accompanying
index present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, Westbridge
Capital Corp. filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware on September 16, 1998. The Bankruptcy Court confirmed the Plan of
Reorganization on December 17, 1998, and, after the satisfaction of a number of
conditions, the Plan of Reorganization became effective on March 24, 1999 and
the Company emerged from bankruptcy. In connection with its emergence from
Chapter 11, Westbridge Capital Corp. changed its corporate name to Ascent
Assurance, Inc. and adopted fresh start accounting.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dallas, Texas
March 29, 2000
ASCENT ASSURANCE, INC.
CONSOLIDATED BALANCE SHEETS
Year Ended
December 31,
2000 1999
----------- -----------
Assets (in thousands, except per share data)
- - ------
Investments:
Fixed Maturities:
Available-for-sale, at market value (amortized cost
$104,081 and $103,436) $ 100,590 $ 97,563
Equity securities, at market (cost $1,365) 1,335 1,313
Other investments 398 413
Short-term investments 7,254 10,904
----------- -----------
Total Investments 109,577 110,193
Cash 2,658 5,110
Accrued investment income 1,965 2,030
Receivables from agents, net of allowance for doubtful
accounts of $3,711 and $6,060 8,737 7,062
Deferred policy acquisition costs 24,711 19,393
Deferred tax asset, net - 7,086
Property and equipment, net of accumulated depreciation
of $2,683 and $1,546 6,375 6,272
Other assets 6,455 6,544
----------- -----------
Total Assets $ 160,478 $ 163,690
=========== ===========
Liabilities, Redeemable Convertible Preferred Stock and Stockholders' Equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits $ 61,306 $ 57,119
Claim reserves 42,778 38,776
----------- -----------
Total Policy Liabilities and Accruals 104,084 95,895
Accounts payable and other liabilities 15,667 13,592
Notes payable 8,947 7,162
----------- -----------
Total Liabilities 128,698 116,649
----------- -----------
Redeemable convertible preferred stock 27,705 23,257
----------- -----------
Stockholders' Equity
Common stock ($.01 par value, 30,000,000 shares
authorized; 6,500,000 shares issued) 65 65
Capital in excess of par value 27,620 27,338
Accumulated other comprehensive loss, net of tax (2,324) (3,851)
Retained Earnings (21,286) 232
----------- -----------
Total Stockholders' Equity 4,075 23,784
----------- -----------
Total Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity $ 160,478 $ 163,690
=========== ===========
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Nine Months
Ended Ended
December 31, 2000 December 31, 1999
----------------- -----------------
Revenues: (in thousands, except per share data)
Premiums:
First-year $ 30,984 $ 14,350
Renewal 88,924 72,021
------------ ------------
Total Premiums 119,908 86,371
Net investment income 9,741 6,740
Fee and service income 20,391 13,069
Net realized loss on investments (454) (208)
------------ ------------
Total Revenue 149,586 105,972
------------ ------------
Benefits, claims and expenses:
Benefits and claims 101,940 65,699
Increase in deferred acquisition costs (6,818) (4,354)
Commissions 25,010 17,891
General and administrative expenses 35,159 21,034
Recognition of premium deficiency 1,500 -
Taxes, license and fees 5,105 3,422
Interest expense on notes payable 629 284
Resolution of pre-confirmation contingencies - (1,235)
------------ ------------
Total Expenses 162,525 102,741
(Loss) income before income taxes (12,939) 3,231
Federal income tax benefit (expense) (6,003) (1,125)
------------ ------------
Net (Loss) Income (18,942) 2,106
Preferred stock dividends 2,576 1,874
------------ ------------
(Loss) income applicable to common stockholders $ (21,518) $ 232
============ ============
Basic and diluted net (loss) income per common share $ (3.31) $ 0.04
============ ============
Weighted average shares outstanding:
Basic 6,500 6,500
============ ============
Diluted 6,500 6,510
============ ============
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Year
Ended Ended
March 31, 1999 December 31, 1998
----------------- -----------------
Revenues: (in thousands, except per share data)
Premiums:
First-year $ 3,121 $ 19,161
Renewal 26,827 116,556
----------------- -----------------
Total Premiums 29,948 135,717
Net investment income 2,562 12,011
Fee and service income 4,263 16,780
Net realized loss on investments 41 2,142
----------------- -----------------
Total Revenue 36,814 166,650
----------------- -----------------
Benefits, claims and expenses:
Benefits and claims 21,799 99,419
Increase in deferred acquisition costs (862) 40
Commissions 6,688 33,907
General and administrative expenses 7,229 29,181
Reorganization expense - 9,179
Recognition of premium deficiency - 4,948
Taxes, licenses and fees 1,059 5,216
Interest expense on notes payable 119 881
Interest expense on retire/cancelled debt 507 5,933
----------------- -----------------
Total Expenses 36,539 188,704
Income (loss) before income taxes 275 (22,054)
Federal income tax expense (67) (231)
----------------- -----------------
Net Income (Loss) $ 208 $ (22,285)
Preferred stock dividends - 520
----------------- -----------------
Income (loss) applicable to common stockholders $ 208 $ (22,805)
================= =================
Basic and diluted net income per common share $ 0.03 $ (3.43)
================= =================
Weighted average shares outstanding:
Basic 7,032 6,640
================= =================
Diluted 7,032 6,640
================= =================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Nine Months
Ended Ended
December 31, 2000 December 31, 1999
----------------- -----------------
(in thousands)
Net (loss) income $ (18,942) $ 2,106
Other comprehensive income (loss):
Unrealized holding loss arising
during period, net of tax 1,227 (3,956)
Reclassification adjustment of gain
on sales of investments included
in net income, net of tax 300 105
----------------- -----------------
Comprehensive Loss $ (17,415) $ (1,745)
================= =================
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Year
Ended Ended
March 31, 1999 December 31, 1998
----------------- -----------------
(in thousands)
Net income (loss) $ 208 $ (22,285)
Other comprehensive income (loss):
Unrealized holding gain (loss)
arising during period, net of tax (1,959) 534
Reclassification adjustment of loss
on sales of investments included
in net income, net of tax (27) (1,272)
----------------- -----------------
Comprehensive Loss $ (1,778) $ (23,023)
================= =================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Accumulated
Capital Other Retained Total
Common Stock in Excess Comprehensive (Deficit) Stockholders'
------------
Shares Amount of Par Value Loss Earnings Equity
Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103
Net income 2,106 2,106
Preferred stock dividend (1,874) (1,874)
Other comprehensive loss, net of tax (3,851) (3,851)
Amortization of unearned compensation 300 300
----------- --------- ------------ ------------ ----------- -------------
Balance at December 31, 1999 6,500,000 65 27,338 (3,851) 232 23,784
=========== ========= ============ ============ =========== =============
Net loss (18,942) (18,942)
Preferred stock dividend (2,576) (2,576)
Other comprehensive income, net of tax 1,527 1,527
Amortization of unearned compensation 282 282
----------- --------- ------------ ------------- ----------- -------------
Balance at December 31, 2000 6,500,000 $ 65 $ 27,620 $ (2,324) $ (21,286) $ 4,075
=========== ========= ============ ============= =========== =============
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share data)
Accumulated
Capital Other Retained Total
Common Stock in Excess Comprehensive (Deficit) Stockholders'
------------
Shares Amount of Par Value Income (Loss) Earnings Equity
Balance at December 31, 1997 6,195,439 $ 620 $ 30,843 $ 4,649 $ (81,530) $ (45,418)
Net loss (22,285) (22,285)
Preferred stock dividend (520) (520)
Other comprehensive loss, net of tax (738) (738)
Preferred stock converted to common 840,071 83 6,982 7,065
Other, net 299 - (184) (184)
----------- ---------- ------------- ------------- ----------- -------------
Balance at December 31, 1998 7,035,809 703 37,641 3,911 (104,335) (62,080)
=========== ========== ============= ============= =========== =============
Net income 208 208
Other comprehensive loss, net of tax (1,986) (1,986)
Cancellation of old preferred stock 11,935 (3,088) 8,847
Issuance of new preferred stock (477) (477)
Cancellation of old common stock (7,035,809) (703) (703)
Issuance of new common stock 6,500,000 65 79,203 79,268
Fresh start adjustments (101,741) (1,925) 107,692 4,026
----------- ---------- ------------- ------------- ----------- -------------
Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103
=========== ========== ============= ============= =========== =============
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Nine Months
Ended Ended
December 31, 2000 December 31, 1999
----------------- -----------------
Cash Flow From Operating Activities: (in thousands, except per share data)
Net (loss) income $ (18,942) $ 2,106
Adjustments to reconcile net income to cash used for
operating activities:
Recognition of premium deficiency 1,500 -
Decrease in accrued investment income 65 139
Increase in deferred acquisition costs (6,818) (4,354)
(Increase) decrease in receivables from agents (1,675) 1,120
Decrease (increase) in other assets 88 (1,200)
Increase in policy liabilities and accruals 8,189 89
Increase (decrease) in accounts payable and
accruals 2,075 (4,949)
Decrease in deferred income taxes, net 7,086 261
Other, net 3,557 1,707
---------------- -----------------
Net Cash Used For Operating Activities (4,875) (5,081)
---------------- -----------------
Cash Flow From Investing Activities:
Purchases of fixed maturity investments (55,678) (9,001)
Sales of fixed maturity investments 49,463 17,096
Maturities and calls of fixed maturity investments 4,631 1,132
Net decrease in short term and other investments 3,665 873
Property and equipment purchased (1,443) (4,193)
---------------- -----------------
Net Cash Provided By Investing Activities 638 5,907
---------------- -----------------
Cash Flow From Financing Activities:
Issuance of notes payable 2,873 4,129
Repayment of notes payable (1,088) (2,055)
---------------- -----------------
Net Cash Provided By Financing Activities 1,785 2,074
---------------- -----------------
Increase (Decrease) In Cash During Period (2,452) 2,900
Cash At Beginning Of Period 5,110 2,210
---------------- -----------------
Cash At End Of Period $ 2,658 $ 5,110
================ =================
See the Notes to the Consolidated Financial Statements.
WESTBRIDGE CAPITAL CORP.
(now ASCENT ASSURANCE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Year
Ended Ended
March 31, 1999 December 31, 1998
----------------- -----------------
Cash Flows From Operating Activities: (in thousands, except per share data)
Net income (loss) $ 208 $ (22,285)
Adjustments to reconcile net income (loss) to cash
provided by (used for) operating activities:
Recognition of premium deficiency - 4,948
(Increase) decrease in deferred acquisition costs (862) 40
Decrease in receivables from agents 1,678 10,643
(Increase) decrease in other assets (1,007) 513
Decrease in policy liabilities and accruals (2,181) (9,608)
Increase in accounts payable and accruals 4,428 6,532
Decrease in deferred income taxes, net (1,070) -
Other, net 1,308 1,211
----------------- ----------------
Net Cash Provided By (Used For) Operating Activities 2,502 (8,006)
----------------- ----------------
Cash Flows From Investing Activities:
Proceeds from investments sold:
Fixed maturities, called or matured 2,215 7,531
Fixed maturities, sold 4,904 13,810
Other investments, sold or matured 139 8,913
Cost of investments acquired (5,851) (15,772)
Other (873) (1,184)
----------------- ----------------
Net Cash Provided By (Used For) Investing Activities 534 13,298
----------------- ----------------
Cash Flows From Financing Activities:
Retirement of senior subordinated debentures (15,167) -
Issuance of preferred stock 15,167 -
Decrease in deferred debt costs - 864
Issuance of notes payable 911 5,461
Repayment of notes payable (2,015) (12,369)
----------------- ----------------
Net Cash Used For Financing Activities (1,104) (6,044)
----------------- ----------------
Increase (Decrease) In Cash During Period 1,932 (752)
Cash At Beginning Of Period 278 1,030
----------------- ----------------
Cash At End Of Period $ 2,210 $ 278
================= ================
See the Notes to the Consolidated Financial Statements.
ASCENT ASSURANCE, INC.
(formerly, Westbridge Capital Corp.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Ascent Assurance, Inc. ("Ascent"), a Delaware company incorporated in 1982, is
an insurance holding company engaged in the development, marketing, underwriting
and administration of medical expense and supplemental health insurance
products, primarily to self-employed individuals and small business owners.
Ascent adopted its corporate name on March 24, 1999, the date its predecessor,
Westbridge Capital Corp. ("Westbridge"), emerged from Chapter 11 reorganization
proceedings (see Note 4). References herein to the "Company" shall mean for all
periods on or prior to March 31, 1999, Westbridge and its subsidiaries, and for
all periods on or after the close of business on March 31, 1999, Ascent and its
subsidiaries.
The Company's revenues result primarily from premiums and fees from the
insurance products sold by its wholly owned subsidiaries National Foundation
Life Insurance Company ("NFL"), Freedom Life Insurance Company of America
("FLICA"), National Financial Insurance Company ("NFIC") and American Insurance
Company of Texas ("AICT", and together with NFL, NFIC and FLICA, collectively,
the "Insurance Subsidiaries") and marketed by NationalCare(R) Marketing, Inc.
("NCM"), also a wholly owned subsidiary. To a lesser extent the Company derives
revenue from (i) telemarketing services, (ii) printing services, and (iii)
renewal commissions received by the Company for prior year sales of insurance
products underwritten by unaffiliated insurance carriers.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
("GAAP") and include the accounts of Ascent Assurance, Inc. and its
subsidiaries. All significant inter-company accounts and transactions have been
eliminated. Certain reclassifications of prior years' amounts have been made to
conform with the 2000 financial statement presentation.
Fresh Start Adjustments. In accordance with the American Institute of Certified
Public Accountants' Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," the Company
adopted fresh start reporting effective March 31, 1999 (see Note 4). Fresh start
reporting requires the new reporting entity created on the reorganization
effective date to determine a reorganization book value. The reorganization book
value is allocated to the fair value of assets and liabilities similar to the
purchase method of accounting under Accounting Principles Board Opinion No. 16.
As a result of the application of fresh start reporting, the financial
statements of Ascent issued subsequent to the adoption of fresh start reporting
will not be comparable with those of Westbridge prepared before adoption of
fresh start accounting, including the historical financial statements of
Westbridge in this annual report. With the adoption of fresh start accounting,
the Company retained a fiscal accounting year ended on December 31 of each year.
Ascent's reorganization book value was determined with the assistance of its
financial advisors. The significant factors used in the determination of
reorganization book value were analyses of industry, economic and overall market
conditions, historical and projected performance of the Company, and certain
financial analyses, including discounted future cash flows.
The effects of the Plan and fresh start reporting on the Company's consolidated
balance sheet as of March 31, 1999 are as follows (in thousands):
Westbridge Issue New Issue New Fresh Start Ascent
03/31/1999 Preferred (a) Common (b) Adjustments (c) 03/31/1999
------------ ------------- ------------- --------------- --------------
Assets
Total investments $ 126,932 $ $ $ $ 126,932
Cash 2,210 2,210
Accrued investment income 2,169 2,169
Agent receivables, net 8,182 8,182
Deferred policy acquisition costs 15,039 15,039
Deferred tax asset, net 1,070 6,277 7,347
Other assets 13,504 (3,088) (2,500) 7,916
------------ ------------- ------------- --------------- --------------
Total assets $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795
============ ============= ============= =============== ==============
Liabilities, Preferred Stock & Equity
Policy liabilities and accruals $ 95,806 $ $ $ $ 95,806
Accounts payable and accruals 18,790 (249) 18,541
Notes payable 5,088 5,088
Accrued dividends 1,304 (1,304) -
Accrued interest 10,518 (3,257) (7,261) -
Senior subordinated notes, net 19,523 (19,523) -
Convertible subordinated notes 70,000 (70,000) -
------------ ------------- ------------- --------------- --------------
Total liabilities 221,029 (22,780) (78,565) (249) 119,435
Old Series A preferred stock 11,935 (11,935) -
New Series A preferred stock 23,257 23,257
------------ ------------- ------------- --------------- --------------
Total preferred stock 11,935 23,257 (11,935) - 23,257
Old common stock 703 (703) -
New common stock 65 65
Additional paid in capital 37,641 91,138 (101,741) 27,038
Accumulated other comprehensive
income, net of tax 1,925 (1,925) -
Retained earnings (104,127) (477) (3,088) 107,692 -
------------ ------------- ------------- --------------- --------------
Total equity (63,858) (477) 87,412 4,026 27,103
------------ ------------- ------------- --------------- --------------
Total liabilities, preferred
stock and equity $ 169,106 $ - $ (3,088) $ 3,777 $ 169,795
============ ============= ============= =============== ==============
(a) Reflects issuance of 23,257 shares of New Preferred Stock to CSFB for $15.2
million in cash and exchange of Senior Notes held by CSFB, including
accrued interest, for $8.1 million. Includes simultaneous retirement of
Senior Notes held by holders other than CSFB, including accrued interest,
for $15.2 million and write-off of unamortized debt discount of $0.5
million.
(b) Reflects issuance of 6,500,000 shares of New Common Stock in exchange for
Convertible Notes, Old Preferred Stock, Old Common Stock and settlement of
general unsecured claims. Includes 32,500 shares of New Common Stock issued
to management on the Effective Date, and includes write-off of unamortized
debt issuance costs of $3.1 million.
Reflects adjustments to record assets and liabilities at fair market value and
to set retained earnings to zero.
The following significant accounting policies are applicable to the financial
statements of both Ascent and Westbridge, unless otherwise indicated.
Investments. The Company's fixed maturity portfolio is classified as
available-for-sale and is carried at estimated market value. Equity securities
(common and nonredeemable preferred stocks) are also carried at estimated market
value. With the application of fresh start reporting, the Company's marketable
securities book values under GAAP were adjusted to equal the market values of
such securities at March 31, 1999. Accordingly, the stockholders' equity section
of Ascent's March 31, 1999 fresh start balance sheet reflects a zero balance in
accumulated other comprehensive income. Changes in aggregate unrealized
appreciation or depreciation on fixed maturity and equity securities subsequent
to March 31, 1999 are reported directly in stockholders' equity, net of
applicable deferred income taxes and, accordingly, will have no effect on
current operations.
Deferred Policy Acquisition Costs ("DPAC"). Policy acquisition costs consisting
of commissions and other policy issue costs, which vary with and are primarily
related to the production of new business, are deferred and amortized over
periods not to exceed the estimated premium-paying periods of the related
policies. Also included in DPAC is the cost of insurance purchased on acquired
business. The amortization of these costs is based on actuarially estimated
future premium revenues, and the amortization rate is adjusted periodically to
reflect actual experience. Projected future levels of premium revenue are
estimated using assumptions as to interest, mortality, morbidity and withdrawals
consistent with those used in calculating liabilities for future policy
benefits. No changes were made to DPAC assumptions for purposes of fresh start
accounting.
Future Policy Benefits. Liabilities for future policy benefits not yet incurred
are computed primarily using the net level premium method including actuarial
assumptions as to investment yield, mortality, morbidity, withdrawals,
persistency and other assumptions which were appropriate at the time the
policies were issued. Assumptions used are based on the Company's experience as
adjusted to provide for possible adverse deviation. Generally, these actuarial
assumptions are fixed and, absent material adverse benefit experience, are not
adjusted. No changes were made to such actuarial assumptions for purposes of
fresh start accounting.
Claim Reserves. Claim reserves represent the estimated liabilities on claims
reported plus claims incurred but not yet reported. No changes were made to
claim reserve estimates for purposes of fresh start accounting. The process of
estimating claim reserves involves the active participation of experienced
actuarial consultants with input from the underwriting, claims, and finance
departments. The inherent uncertainty in estimating claim reserves is increased
when significant changes occur. Examples of such changes include: (1) changes in
economic conditions; (2) changes in state or federal laws and regulations,
particularly insurance reform measures; (3) changes in production sources for
existing lines of business; (4) writings of significant blocks of new business
and (5) significant changes in claims payment patterns. As a result of the
implementation of a new claims administration system in May 2000, the Company's
claims payment pattern accelerated in the fourth quarter of 2000 which resulted
in a significant reduction in pending claims inventory at December 31, 2000.
This significant change in claims payment pattern has significantly increased
the inherent uncertainty in estimating claim reserves at December 31, 2000.
Because claim reserves are estimates, management monitors reserve adequacy over
time, evaluating new information as it becomes available and adjusting claim
reserves as necessary. Such adjustments are reflected in current operations.
Federal Income Taxes. The Company records income taxes based on the asset and
liability approach, which requires the recognition of deferred tax liabilities
and assets for the expected future tax consequence of temporary differences
between the carrying amounts and the tax basis of assets and liabilities. The
tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation allowance, reducing any recognized
deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized. The deferred tax
asset at December 31, 2000 is fully reserved as discussed at Note 11.
In connection with its reorganization, the Company realized a non-taxable gain
from the extinguishment of certain indebtedness for tax purposes, since the gain
resulted from a reorganization under the Bankruptcy Code. As a result, the
Company was required to reduce certain tax attributes of Ascent Assurance, Inc.,
including (i) NOLs, (ii) certain tax credits, and (iii) tax bases in assets in
an amount equal to the gain on extinguishment.
Resolution of Preconfirmation Contingencies. Preconfirmation contingencies are
disputed, unliquidated or contingent claims that are unresolved at the date of
the confirmation of the plan of reorganization. As part of fresh start
accounting, the Company estimated and recorded values for preconfirmation
contingencies relative to the payment of professional fees and the collection of
receivables from third parties. During the third quarter of 1999, the Company
favorably resolved such preconfirmation contingencies. In accordance with
generally accepted accounting principles, the Company recognized $1.2 million of
income relative to the favorable resolution of such preconfirmation
contingencies.
Earnings Per Share. Under GAAP, there are two measures of earnings per share:
"basic earnings per share" and "diluted earnings per share." Basic earnings per
share is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were converted or exercised.
Diluted weighted average shares exclude all convertible securities for loss
periods.
The following tables reflect the calculation of basic and diluted earnings per
share:
Year Nine Months
Ended Ended
Ascent Assurance, Inc. December 31, 2000 December 31, 1999
----------------- -----------------
(Amounts in 000's, except per share amounts)
Basic:
(Loss) income available to common shareholders $ (21,518) $ 232
================= =================
Weighted average shares outstanding 6,500 6,500
================= =================
Basic (loss) earnings per share $ (3.31) $ 0.04
================= =================
Diluted:
(Loss) income available to common shareholders $ (21,518) $ 232
================= =================
Weighted average shares outstanding 6,500 6,510
================= =================
Diluted (loss) earnings per share $ (3.31) $ 0.04
================= =================
Three Months Year
Ended Ended
Westbridge Capital Corp. March 31, 1999 December 31, 1998
----------------- -----------------
Basic:
Income (loss) available to common shareholders $ 208 $ (22,805)
================= =================
Weighted average shares outstanding 7,032 6,640
================= =================
Basic earnings (loss) per share $ 0.03 $ (3.43)
================= =================
Diluted:
Income (loss) available to common shareholders $ 208 $ (22,805)
================= =================
Weighted average shares outstanding 7,032 6,640
================= =================
Diluted earnings (loss) per share $ 0.03 $ (3.43)
================= =================
Use of Estimates. The preparation of financial statements in conformity 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Recently Issued Accounting Pronouncements. In 1998, the NAIC adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The Codification provides guidance for areas
where statutory accounting has been silent and changes current statutory
accounting in certain areas. The insurance departments of the states of domicile
of the Company's insurance subsidiaries have adopted the Codification effective
January 1, 2001. The Company does not expect the Codification to materially
impact statutory surplus.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). This statement (as amended by
SFAS No. 137, "Accounting For Derivative Instruments and Hedging Activities,
Deferral of the Effective Date of SFAS No. 133, an amendment of SFAS No. 133")
is effective for fiscal years beginning after June 15, 2000. The pronouncement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. As the Company has not participated in derivative or hedging
activities, the Company's financial statements are not affected by SFAS 133.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion No. 25" ("FIN 44"). The Company adopted FIN 44 on a prospective basis
effective July 1, 2000. The adoption of FIN 44 did not have a material impact on
the Company's results of operations, liquidity or financial position.
NOTE 3 - FINANCING OBTAINED IN APRIL 2001
During the first quarter of 2001, the Company determined that continued adverse
claims experience for the Group Preferred Provider Organization ("GPPO")
product, the principal product marketed by the Company from 1998 through June
2000, would require Ascent to make capital contributions to FLICA in excess of
those originally planned. Ascent obtained debt financing (see below) and
contributed an additional $11 million to FLICA in April 2001 to enable FLICA to
maintain an RBC Ratio greater than Company Action Level at March 31, 2001 and to
comply with the Florida premium writing ratio regulation (see Note 12). To the
extent that the adverse claims experience for the old GPPO product exceeds
management's current estimates, Ascent would be required to make additional
capital contributions to FLICA in excess of those currently projected for 2001.
Additional financing would be required by Ascent in order to make any such
"excess" contributions. Management believes that significant rate increase
actions will reduce losses from the GPPO product in 2001.
In April 2001, Ascent received debt financing for the $11 million capital
contribution described above from a loan made by Credit Suisse First Boston
Management Corporation, which is an affiliate of Special Situations Holdings,
Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating
to that loan provided Ascent with total loan commitments of $11 million (all of
which has been drawn). The loan bears interest at a rate of 12% per annum and
matures in April 2004. Absent any acceleration following an event of default,
the Company may elect to pay interest in kind by issuance of additional notes.
The credit agreement relating to the loan provides for a facility fee of $1.5
million which is payable upon maturity or upon a change in control, as defined.
Ascent's obligations are secured, pursuant to a guarantee and security agreement
and pledge agreements, by substantially all of the assets of Ascent and its
subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL,
NFIC, NCM, Ascent Funding Corporation and Ascent Management, Inc., some or all
of which is pledged as collateral to LaSalle Bank NA ("LaSalle") for receivables
financing - see Note 8. Ascent's subsidiaries (other than those listed above)
have also guaranteed Ascent's obligations under the credit agreement and the
loan. In connection with the $11 million loan, LaSalle waived certain events of
default and amended various agreements related to receivables financing
described at Note 8. Debt covenants under the credit agreement related to the
$11 million loan are substantially similar to those under the LaSalle receivable
financing arrangements.
NOTE 4 - REORGANIZATION EFFECTIVE MARCH 24, 1999
On September 16, 1998, Westbridge Capital Corp., ("Westbridge") commenced its
reorganization by filing a voluntary petition for relief under Chapter 11, Title
11 of the United States Code in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"), along with a disclosure statement
(as amended, the "Disclosure Statement") and a proposed plan of reorganization
(as amended, the "Plan"). The filing of the Disclosure Statement and Plan
culminated months of negotiations between Westbridge and an ad hoc committee
(the "Creditors' Committee") of holders of its 11% Senior Subordinated Notes due
2002 (the "Senior Notes") and its 7-1/2% Convertible Subordinated Notes due 2004
(the "Convertible Notes"). The Disclosure Statement was approved by entry of an
order by the Bankruptcy Court on October 30, 1998. Following the approval of the
Plan by the holders of allowed claims and equity interests, the Bankruptcy Court
confirmed the Plan on December 17, 1998. The Plan became effective March 24,
1999 (the "Effective Date").
On the Effective Date, Westbridge's certificate of incorporation and by-laws
were amended and restated in their entirety and pursuant thereto, Westbridge
changed its corporate name to "Ascent Assurance, Inc." ("Ascent"). References
herein to the "Company" shall mean for all periods on or prior to March 31,
1999, Westbridge and its subsidiaries, and for all periods on or after the close
of business on March 31, 1999, Ascent and its subsidiaries.
The following summary of the Plan omits certain information set forth in the
Plan. Any statements contained herein concerning the Plan are not necessarily
complete, and in each such instance reference is made to the Plan, a copy of
which is incorporated by reference to Exhibit 2 of Westbridge's Current Report
on Form 8-K which was filed with the Securities and Exchange Commission on
December 29, 1998. Each such statement is qualified in its entirety by such
reference. The Plan provided for the recapitalization of certain old debt and
equity interests in Westbridge and the issuance of new equity securities and
warrants. Key terms of the Plan included the following:
Cancellation of Existing Securities. Pursuant to the Plan, the following
securities of Westbridge were canceled as of the Effective Date: (i) $23.3
million aggregate principal amount and all accrued and unpaid interest on, the
Senior Notes, (ii) $77.3 million aggregate principal amount and all accrued and
unpaid interest on, the Convertible Notes, (iii) $13.2 million aggregate
liquidation preference of and all accrued and unpaid dividends on, Westbridge's
Series A Convertible Redeemable Exchangeable Preferred Stock (the "Old Preferred
Stock"), (iv) Westbridge's Common Stock, par value $.10 per share (the "Old
Common Stock"), (v) all outstanding warrants to purchase Old Common Stock, (vi)
all outstanding unexercised stock options to purchase Old Common Stock, and
(vii) all unvested grants of restricted Old Common Stock.
New Equity Capital Structure Pursuant to Ascent's Amended and Restated
Certificate of Incorporation, the total number of shares of capital stock Ascent
has the authority to issue is 30,040,000, consisting of 30,000,000 shares of
common stock, par value $.01 per share (the "New Common Stock") and 40,000
shares of preferred stock, par value $.01 per share, all of which are designated
Series A Convertible Preferred Stock (the "New Preferred Stock")
DISTRIBUTIONS UNDER THE PLAN
Cash Distribution
To the holders of Senior Notes other than Credit Suisse First Boston Corporation
("CSFB"), cash payments totaling approximately $15.2 million, which equaled the
total Allowed 11% Senior Note Claims (as defined in the Plan) held by creditors
other than CSFB, were distributed subject to completion of the exchange of
securities as contemplated by the Plan. In order to provide the Company with
sufficient funds to make the cash distribution to the holders of the Allowed 11%
Senior Notes under the Plan, an affiliate of CSFB (the "CSFB Affiliate")
purchased all of the shares of the New Preferred Stock which were not otherwise
distributed under the Plan.
Issuance of New Securities
Pursuant to the Plan and the purchase of New Preferred Stock, 6,500,000 shares
of New Common Stock and 23,257 shares of New Preferred Stock were issued,
subject to the completion of the exchange requirements as contemplated by the
Plan, on the Effective Date as follows:
|X| To holders of general unsecured claims and Convertible Notes as of December
10, 1998 6,077,500 shares, and to management at the Effective Date, 32,500
shares, or in aggregate 94% of the New Common Stock issued on the Effective
Date. Holders of general unsecured claims and Convertible Notes received
their first distribution of shares in partial satisfaction and discharge of
the allowed claims in April 1999. The second distribution was made in
September 1999 and the remaining shares of New Common Stock were
distributed in November 1999.
|X| To holders of Old Preferred Stock as of December 10, 1998, 260,000 shares,
or 4%, of the New Common Stock issued on the Effective Date and Warrants
("New Warrants") to purchase an additional 277,505 shares, or 2%, of the
New Common Stock issued on the Effective Date, on a fully diluted basis.
|X| To holders of Old Common Stock as of December 10, 1998, 130,000 shares or
2%, of the New Common Stock issued on the Effective Date and New Warrants
to purchase an additional 693,761 shares, or 5%, of the New Common Stock
issued on the Effective Date, on a fully diluted basis. Fractional shares
of New Common Stock were not issued in connection with the Plan. As a
result of this provision, certain holders of Old Common Stock received no
distribution of New Common Stock or New Warrants under the Plan.
|X| To the CSFB Affiliate, in respect of the Senior Notes owned by CSFB as of
December 10, 1998, 8,090 shares of New Preferred Stock which, together with
the 15,167 additional shares of New Preferred Stock purchased by the CSFB
Affiliate as described above, are convertible into 4,765,165 shares of the
New Common Stock. As a result of the New Preferred Stock received by the
CSFB Affiliate, together with the 3,093,998 shares of New Common Stock
received by the CSFB Affiliate in respect of the Convertible Notes owned by
CSFB, the CSFB Affiliate beneficially owns approximately 56.6% of the New
Common Stock on an as converted basis, assuming the exercise of all New
Warrants and issuance of New Common Stock reserved under the 1999 Stock
Option Plan as discussed below. The New Preferred Stock has a stated value
of $1,000 per share and a cumulative annual dividend rate of $102.50 per
share payable in January of each year in cash or by the issuance of
additional shares of New Preferred Stock. The New Preferred Stock is
convertible at any time into 204.8897 shares of New Common Stock at an
initial conversion price of $4.88 per share of New Common Stock, subject to
customary anti-dilution adjustments.
Reservation of Additional New Common Stock
In connection with the New Warrants described above, 971,266 shares of New
Common Stock are reserved for issuance upon the exercise of New Warrants. The
New Warrants are exercisable at an initial exercise price $9.04 per share of New
Common Stock, subject to customary anti-dilution adjustments, and will expire on
March 24, 2004.
Pursuant to the Plan, up to 1,251,685 shares, or 10%, of the fully diluted
number of shares of New Common Stock issued and outstanding on the Effective
Date are reserved for issuance to employees and directors, and up to 387,119
shares, or 3%, of the fully diluted number of shares of New Common Stock issued
on the Effective Date are reserved for issuance to the Company's marketing
agents under the Company's 1999 Stock Option Plan, which was approved by the
Company's shareholders.
NOTE 5 - INVESTMENTS
Major categories of investment income are summarized as follows:
Ascent Assurance, Inc. Westbridge Capital Corp.
----------------------------- -----------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, March 31, December 31,
2000 1999 1999 1998
---- ---- ---- ----
Fixed maturities $ 7,088 $ 5,368 $ 2,125 $ 8,754
Short-term investments 741 291 86 708
Interest on receivables from agents 1,936 941 345 2,511
Other 189 201 73 351
------------- ------------- ------------- -------------
9,954 6,801 2,629 12,324
Less: Investment expenses 213 61 67 313
------------- ------------- ------------- -------------
Net investment income $ 9,741 $ 6,740 $ 2,562 $ 12,011
============= ============= ============= =============
Realized (loss) gain on investments are summarized as follows:
Ascent Assurance, Inc. Westbridge Capital Corp.
----------------------------- -----------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, March 31, December 31,
2000 1999 1999 1998
---- ---- ---- ----
Fixed maturities $ (454) $ (162) $ 40 $ 403
Equity securities - (37) 1 1,555
Other - (9) - 184
------------- ------------- ------------- -------------
Realized (loss) gain on investments $ (454) $ (208) $ 41 $ 2,142
============= ============= ============= =============
Unrealized (depreciation) appreciation on investments is reflected directly in
stockholders' equity as a component of accumulated other comprehensive (loss)
income and is summarizes as follows:
Ascent Westbridge
------------------------------ -------------
Year Nine Months Three Months
Ended Ended Ended
December 31, March 31,
2000 1999 1999
---- ---- ----
Balance at beginning of period $ (3,851) $ - $ 3,911
Unrealized depreciation, net of tax, on
fixed maturities available-for-sale 1,513 (3,817) (1,840)
Unrealized depreciation, net of tax, on
equity securities and other investments 14 (34) (146)
Fresh start adjustment - - (1,925)
------------- -------------- -------------
Balance at end of period $ (2,324) $ (3,851) $ -
============= ============== =============
Estimated market values represent the closing sales prices of marketable
securities. The amortized cost and estimated market values of investments in
fixed maturities are summarized by category as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 2000 Available-for-Sale Cost Gains Losses Value
- - ------------------------------------ ---- ----- ------ -----
(in thousands)
U.S. Government and governmental
agencies and authorities $ 10,415 $ 74 $ 27 $ 10,462
States, municipalities, and political
subdivisions 2,013 - 31 1,982
Finance companies 23,891 63 509 23,445
Public utilities 7,091 8 312 6,787
Mortgage-backed securities 13,328 28 54 13,302
All other corporate bonds 47,343 143 2,874 44,612
------------- ------------- ------------- ------------
Balance at December 31, 2000 $ 104,081 $ 316 $ 3,807 $ 100,590
============= ============= ============= ============
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1999 Available-for-Sale Cost Gains Losses Value
- - ------------------------------------ ---- ----- ------ -----
(in thousands)
U.S. Government and governmental
agencies and authorities $ 11,113 $ - $ 425 $ 10,688
States, municipalities, and political
subdivisions 2,021 - 154 1,867
Finance companies 25,220 - 1,270 23,950
Public utilities 9,806 - 678 9,128
Mortgage-backed securities 7,823 57 155 7,725
All other corporate bonds 47,453 26 3,274 44,205
------------- ------------- ------------- ------------
Balance at December 31, 2000 $ 103,436 $ 83 $ 5,956 $ 97,563
============= ============= ============= ============
The amortized cost and estimated market value of investments in
available-for-sale fixed maturities as of December 31, 2000, are shown below, in
thousands, summarized by year to contractual maturity. Mortgage-backed
securities are listed separately. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without penalties.
Estimated
Amortized Market
Cost Value
---- -----
(in thousands)
Due in one year or less $ 7,120 $ 7,073
Due after one year through five years 29,223 28,877
Due after five years through ten years 27,244 26,327
Due after ten years 27,166 25,011
Mortgage-backed securities 13,328 13,302
------------ ------------
$ 104,081 $ 100,590
============ ============
A summary of unrealized (depreciation) appreciation on investments in fixed
maturities and equity securities available-for-sale, which is reflected directly
in stockholders' equity as a component of accumulated other comprehensive (loss)
income, is as follows:
December 31, December 31,
2000 1999
---- ----
(in thousands)
Amortized cost $ 105,446 $ 104,801
Estimated market value 101,925 98,876
------------- -------------
(Deficit) excess of market value to amortized cost (3,521) (5,925)
Estimated tax (benefit) provision (1,197) (2,074)
------------- -------------
Unrealized (depreciation) appreciation, net of tax $ (2,324) $ (3,851)
============= =============
At December 31, 2000, the estimated tax benefit related to unrealized investment
losses has been fully reserved (see Note 11).
Proceeds from sales and maturities of investments in fixed maturity securities
were approximately $54.1 million for the year ended December 31, 2000, $18.2
million for the nine months ended December 31, 1999 and $7.1 million for the
three months ended March 31, 1999. Gross gains of $0.3 million and gross losses
of $0.7 million were realized on fixed maturity investment sales during 2000.
Gross gains of $0.1 million and gross losses of $0.3 million were realized on
fixed maturity investment sales during the nine months ended December 31, 1999.
Gross gains of $0.2 million and gross losses of $0.2 million were realized on
fixed maturity investment sales during the three months ended March 31, 1999.
The basis used in determining the cost of securities sold was the specific
identification method.
Included in fixed maturities at December 31, 2000 and 1999, are high-yield,
unrated or less than investment grade corporate debt securities comprising
approximately 0.9% and 1.5% of fixed maturities at December 31, 2000 and 1999,
respectively.
Investment securities on deposit with insurance regulators in accordance with
statutory requirements at December 31, 2000 and 1999 had a par value totaling
$27.2 million and $27.3 million, respectively. At December 31, 2000 and 1999,
the Company had restricted cash and investments totaling $2.5 million related to
its receivables financing program (see Note 8).
NOTE 6 - FUTURE POLICY BENEFITS
Future policy benefits for Accident and Health insurance products have been
calculated using assumptions (which generally contemplate the risk of adverse
deviation) for withdrawals, interest, mortality and morbidity appropriate at the
time the policies were issued. The more material assumptions are as follows:
Withdrawals - Issues through 1980 are based on industry experience; 1981 through
2000 issues are based on industry experience and Company experience,
where available. Policies acquired in acquisitions are based on recent
experience of the blocks acquired.
Interest - Issues through 1980 are 6% graded to 4.5% in 25 years; most 1981
through 1992 issues are 10% graded to 7% in 10 years except for
certain NationalCare and Supplemental Hospital Income issues which are
8% graded to 6% in 8 years and LifeStyles Products which are 9% graded
to 7% in 10 years. 1993 and later issues are 7% level. Certain
policies acquired in 1992 are 6.4% level while other policies acquired
in 1993 and 1994 are 6% level. Policies acquired in the acquisition of
NFIC and AICT are 7% level.
Mortality - Issues through 1980 use the 1955-1960 Ultimate Table; issues
subsequent to 1980 through 1992 us the 1965-1970 Ultimate Table. 1993
and later issues use the 1975-1980 Ultimate Table. Policies acquired
in acquisitions use the 1965-1970 Ultimate Table.
Morbidity - Based on industry tables published in 1974 by Tillinghast, Nelson
and Warren, Inc., as well as other population statistics and morbidity
studies.
NOTE 7 - CLAIM RESERVES
The following table provides a reconciliation of the beginning and ending claim
reserve balances, on a gross-of-reinsurance basis, for 2000, 1999 and 1998, to
the amounts reported in the Company's balance sheet:
Ascent Assurance, Inc. Westbridge Capital Corp.
------------------------------ ------------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, December 31, March 31, December 31,
2000 1999 1999 1998
(in thousands)
Balance at beginning of period (Gross) $ 38,776 $ 41,068 $ 44,116 $ 51,784
Less: reinsurance recoverables on
claim reserves 1,501 1,871 1,765 2,955
------------- ------------- -------------- ----------
Net balance at beginning of period 37,275 39,197 42,351 48,829
Incurred related to:
Current year 94,516 60,255 19,401 98,203
Prior years 1,550 2,213 1,596 (95)
------------- ------------- -------------- ----------
Total incurred 96,066 62,468 20,997 98,108
------------- ------------- -------------- ----------
Paid related to:
Current year 61,834 47,300 5,277 67,911
Prior years 31,220 17,090 18,874 36,675
------------- ------------- -------------- ----------
Total paid 93,054 64,390 24,151 104,586
------------- ------------- -------------- ----------
Balance at end of period 40,287 37,275 39,197 42,351
Plus: reinsurance recoverables on
claim reserves 2,491 1,501 1,871 1,765
------------- ------------- -------------- ----------
Balance at end of period (Gross) $ 42,778 $ 38,776 $ 41,068 $ 44,116
============= ============= ============== ==========
Included in reinsurance recoverables on claim reserves is approximately $1.5
million, $0.5 million, $0.9 million and $0.7 million relating to paid claims as
of December 31, 2000, 1999, March 31, 1999 and December 31, 1998, respectively.
NOTE 8 - FINANCING ACTIVITIES
Credit Arrangement. The Company finances the majority of its obligations to make
commission advances through Ascent Funding, Inc. ("AFI"), an indirect wholly
owned subsidiary. AFI has entered into a Credit Agreement (the "Credit
Agreement") with LaSalle Bank which currently provides AFI with a $7.5million
revolving loan facility (the "Receivables Financing"), the proceeds of which are
used to purchase agent advance receivables from FLICA and NFL and certain
affiliated marketing companies. Effective September 30, 2000, the Credit
Agreement was amended to extend the termination date to June 5, 2002. As of
December 31, 2000, $6.2 million was outstanding under the Credit Agreement
(weighted average interest rate of 8.31%). The Company incurs a commitment fee
on the unused portion of the Credit Agreement at at rate of 0.50% per annum.
Interest of $0.5 million was expensed and paid in 2000. Interest of $0.3 million
was expensed and paid in 1999.
AFI's obligations under the Credit Agreement are secured by liens upon
substantially all of AFI's assets. AFI's obligations under the Credit Agreement
have been guaranteed by Ascent (the "Guaranty Agreement"), and the Company has
pledged all of the issued and outstanding shares of the capital stock of AFI,
NFL, FLICA and NFIC as collateral for that guaranty. See Note 3 for discussion
of compliance with debt covenants.
In July 1999, Ascent Management, Inc. ("AMI") entered into a $3.3 million term
loan agreement with LaSalle, secured by substantially all of AMI's assets and
the guarantee of Ascent. Principal is payable in 60 equal monthly installments
beginning January 31, 2000. As of December 31, 2000, $2.8 million was
outstanding under the term loan facility (weighted average interest rate of
8.24%). Interest of $0.2 million was expensed and paid in 2000. Interest of $0.1
million was capitalized and paid in 1999.
Prior to the Effective Date of the Plan (see Note 4), the Company had the
following debt securities outstanding:
Senior Notes During the first quarter of 1995, the Company issued $20.0 million
aggregate principal amount of its Senior Notes, due 2002, in an underwritten
public offering. The Senior Notes were issued at par, less an underwriting
discount of 4%. Contractual interest on the Senior Notes was payable in monthly
installments. In November 1997, the Company suspended the scheduled monthly
interest payments on these Senior Notes.
Accrued but unpaid interest on the Senior Notes through the Petition Date was
approximately $2.1 million. The Plan required the continued accrual of interest
on the Senior Notes from the Petition Date to the Effective Date. Accrued but
unpaid interest on the Senior Notes from the Petition Date to December 31, 1998
totaled approximately $0.6 million. Contractual interest continued to accrue at
a rate of $6,111 per day from January 1, 1999 through the Effective Date.
As of the Effective Date, these Senior Notes were canceled, extinguished and
retired. As more fully described in Note 4, holders of Allowed 11% Senior Note
Claims held by creditors other than CSFB received cash payments totaling $15.2
million.
As more fully described in Note 9, in order to provide the Company with
sufficient funds to make the cash distributions to the holders of the Allowed
11% Senior Notes under the Plan, the Company entered into a Stock Purchase
Agreement with CSFB, a significant noteholder, pursuant to which CSFB, subject
to the conditions contained therein, purchased all of the shares of the New
Preferred Stock which were not otherwise distributed under the Plan.
Convertible Notes During the second quarter of 1997, the Company completed the
sale of $70.0 million aggregate principal amount of its Convertible Notes, due
2004, in an underwritten public offering. Contractual interest on the
Convertible Notes was payable in semi-annual installments on May 1 and November
1 of each year, commencing November 1, 1997. In November 1997, the Company
suspended the scheduled interest payments on these Convertible Notes. At the
Petition Date, approximately $7.3 million of unpaid interest was accrued. The
Company did not accrue interest on its Convertible Notes after the Petition Date
as it was unlikely such interest would be paid under the Plan. The amount of
contractual interest that would have otherwise been accrued from the Petition
Date to December 31, 1998 totaled $2.7 million, and such contractual interest
would have continued to accrue at $14,583 per day from January 1, 1999 until the
Effective Date.
As of the Effective Date, these Convertible Notes were canceled, extinguished
and retired. Holders of the Convertible Notes and allowed general unsecured
creditors received their pro rata share of 94% of the New Common Stock issued on
the Effective Date.
Total interest paid on debt in 1998 was $0.8 million.
NOTE 9 - PREFERRED STOCK
New Preferred Stock On March 24, 1999, pursuant to the Plan, the Company
authorized 40,000 shares of non-voting New Preferred Stock, of which 23,257
shares are owned by CSFB (see Note 4).
The following summarized the significant terms of the New Preferred Stock:
x Stated value of $1,000 per share.
x Cumulative annual dividend rate of $102.50 per share payable annually in
arrears on the last day of January in each year by issuance of cash or
additional shares of New Preferred Stock.
x Each share of New Preferred Stock is convertible at any time in 204.8897
shares of New Common Stock at an initial conversation price of $4.88 per
share, subject to customary anti-dilution adjustments.
The New Preferred Stock is mandatorily redeemable in cash on the fifth
anniversary of the Effective Date in an amount equal to the stated value per
share plus all accrued and unpaid dividends thereon to the date of redemption.
In December 2000, the Company paid preferred stock dividends through the
issuance of 2,575 additional shares of preferred stock and a $825 distribution
of cash. Preferred stock dividends accrued at December 31, 1999 were paid in
January 2000 through the issue of 1,873 additional shares of preferred stock and
a $965 distribution of cash.
Prior to the Effective Date of the Plan (see Note 4), the Company had the
following preferred stock outstanding:
Old Preferred Stock
On April 12, 1994, the Company issued 20,000 shares of Old Preferred Stock, at a
price of $1,000 per share. The Old Preferred Stock was issued in a private
placement and was subsequently registered with the Securities and Exchange
Commission under a registration statement, which was declared effective in
October 1994. The terms of the Old Preferred Stock included a cumulative annual
dividend rate of 8.25%, subject to increase to 9.25%, upon non-compliance by the
Company with certain restrictions.
Seven thousand sixty-five (7,065) shares of the Old Preferred Stock were
converted into shares of Old Common Stock during the year ended December 31,
1998. the converted shares of Old Preferred Stock had an aggregate liquidation
preference of $7,065,000 and were converted into 840,071 shares of Old common
Stock. Old Preferred Stock was convertible into 1,419,144 shares of Common Stock
as of December 31, 1998 at a conversion price of $8.41 per share.
One thousand shares of the Company's Old Preferred Stock were converted into
shares of Old Common Stock, par value $.10 per share, during the year ended
December 31, 1997. The converted shares of Old Preferred Stock had an aggregate
liquidation preference of $1,000,000 and were converted into 118,905 shares of
Old Common Stock.
In November 1997, the Company suspended the scheduled dividend payments on its
Old Preferred Stock. The failure to declare and pay the scheduled dividend on
the Old Preferred Stock constituted an event of non-compliance under the terms
of the Old Preferred Stock Agreement and resulted in an immediate increase from
8.25% to 9.25% in the rate at which dividends accrued on the Old Preferred
Stock. At the Petition Date, approximately $1.3 million of cumulative, unpaid
dividends were accrued. The Company did not accrue dividends on its Old
Preferred Stock after the Petition Date as it was unlikely such dividends would
be paid under the Plan. The amount of contractual dividends that would have
otherwise been accrued from the Petition Date to December 31, 1998 totaled $0.6
million, and such contractual dividends would have continued to accrue at $3,067
per day from January 1, 1999 until the Effective Date.
As of the Effective Date, shares of Old Preferred Stock were canceled,
extinguished and retired. Holders of Old Preferred Stock received their pro rata
share of 4% of the New Common Stock issued on the Effective Date and New
Warrants to purchase their pro rata share of up to 2% of the number of shares of
New Common Stock issued and outstanding on the Effective Date, on a fully
diluted basis.
NOTE 10 - DEFERRED POLICY ACQUISITION COSTS ("DPAC")
A summary of DPAC follows (in thousands):
Ascent Assurance, Inc. Westbridge Capital Corp.
------------------------------- ---------------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, December 31, March 31, December 31,
2000 1999 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 19,393 $ 15,039 $ 14,177 $ 19,165
Deferrals 9,816 5,832 1,148 4,371
Recognition of premium deficiency (1,500) - - (4,948)
Amortization expense (2,998) (1,478) (286) (4,411)
-------------- -------------- -------------- --------------
Balance at end of period $ 24,711 $ 19,393 $ 15,039 $ 14,177
============== ============== ============== ==============
Recognition of Premium Deficiency In general, a premium deficiency exists if the
present value of future cash flows plus future policy benefit and claim reserves
at the calculation date is negative or less than net deferred policy acquisition
costs. The calculation of future cash flows includes assumptions as to future
rate increases and persistency. The Company routinely evaluates the
recoverability of deferred acquisition costs in accordance with GAAP. As a
result of fourth quarter losses for certain major medical products, the Company
determined that a premium deficiency of $1.5 million existed at December 31,
2000 related to medical expense reimbursement products issued subsequent to the
fresh start date of March 31, 1999. Accordingly, deferred policy acquisition
costs were reduced by $1.5 million at December 31, 2000 by a non-cash charge to
expense.
During 1998, the Company experienced adverse loss ratios and declining
persistency on its old major medical and Medicare supplement products. As a
result of these factors, the Company undertook a further revaluation of the
recoverability of DPAC in the third quarter of 1998. Based on the results of
this review, the Company determined that a premium deficiency existed and
recorded a non-cash charge to expense of approximately $5.0 million in the third
quarter of 1998.
NOTE 11 - INCOME TAXES
The provision for (benefit from) income taxes is calculated as the amount of
income taxes expected to be payable for the current year plus (or minus) the
deferred income tax expense (or benefit) represented by the change in the
deferred income tax accounts at the beginning and end of the year. The effect of
changes in tax rates and federal income tax laws are reflected in income from
continuing operations in the period such changes are enacted.
The tax effect of future taxable temporary differences (liabilities) and future
deductible temporary differences (assets) are separately calculated and recorded
when such differences arise. A valuation allowance, reducing any recognized
deferred tax asset, must be recorded if it is determined that it is more likely
than not that such deferred tax asset will not be realized.
Taxes paid (recovered) in 2000, 1999 and 1998 were $(1.2) million, $80,000, and
$1.1 million respectively. The Company and its wholly owned subsidiaries, other
than FLICA, file a consolidated federal income tax return. FLICA files a
separate federal income tax return. Prior to 2000, NFIC and AICT filed a
separate consolidated tax return. NFIC and AICT entered the Ascent Assurance
consolidated return in 2000.
The provision for (benefit from) U.S. federal income taxes charged to continuing
operations was as follows:
Ascent Assurance, Inc. Westbridge Capital Corp.
------------------------------ -----------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, December 31, March 31, December 31,
2000 1999 1999 1998
---- ---- ---- ----
(in thousands)
Current $ (206) $ (1,199) $ 67 $ 231
Deferred 6,209 2,324 - -
------------ -------------- ------------ -------------
Total provision for income taxes $ 6,003 $ 1,125 $ 67 $ 231
============ ============== ============ =============
Provision has not been made for state and foreign income tax expense since such
expense is minimal.
The differences between the effective tax rate and the amount derived by
multiplying the (loss) income before income taxes by the federal income tax rate
for the Company's last three years was as follows:
Ascent Assurance, Inc. Westbridge Capital Corp.
------------------------------ -----------------------------
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, December 31, March 31, December 31,
2000 1999 1999 1998
---- ---- ---- ----
Statutory tax rate (34%) 34% 34% (34%)
Change in valuation allowance 80% - - -
Unutilized loss carryforwards - 2% (9%) 31%
Other items, net - (1%) (1%) 4%
------------- ------------- ------------- -------------
Effective tax rate 46% 35% 24% 1%
============= ============= ============= =============
Deferred taxes are recorded for temporary differences between the financial
reporting basis and the federal income tax basis of the Company's assets and
liabilities. The sources of these differences and the estimated tax effect of
each are as follows:
December 31,
2000 1999
---- ----
(in thousands)
Deferred Tax Assets:
Unrealized gain on investments $ 1,197 $ 2,074
Policy reserves 6,792 4,150
Net operating loss carryforwards 13,538 17,998
Other deferred tax assets 3,056 964
-------------- -------------
Total deferred tax asset $ 24,583 $ 25,186
-------------- -------------
Deferred Tax Liabilities:
Deferred policy acquisition costs $ 1,361 $ (2,970)
Other deferred tax liabilities 4,959 4,121
-------------- -------------
Total deferred tax liability $ 6,320 $ 1,151
-------------- -------------
Net Deferred Tax Asset Before Valuation
Allowance $ 18,263 $ 24,035
Less Valuation Allowance (18,263) (16,949)
-------------- -------------
Net Deferred Tax Asset $ - $ 7,086
============== =============
As of December 31, 2000, the Company has reported cumulative pre-tax losses
since the fresh start date of March 31, 1999. Realization of the Company's
deferred tax asset is dependent upon the return of the Company's operations to
profitability. Pre-tax losses during 2000 were principally attributable to
adverse claims experience for certain major medical products. Management
believes that such product losses can be significantly reduced through
aggressive rate increase management. However, projections of future
profitability are significantly discounted when evaluating the recoverability of
deferred tax assets and do not overcome the negative evidence of cumulative
losses. Accordingly, the Company increased its deferred tax asset valuation
allowance by $10.4 million to $18.3 million to fully reserve the remaining net
deferred tax assets as of December 31, 2000. As a result of limitations arising
from the action of sections 108 and 382 of the Internal Revenue Code, the
Company's net operating loss carryforwards and valuation allowance as of
December 31, 1999 were reduced by $9.1 million. Changes in the valuation
allowance applicable to the net deferred tax asset for the three years ended
December 31, 2000 are as follows:
Ascent Assurance, Inc. Westbridge Capital Corp.
Year Nine Months Three Months Year
Ended Ended Ended Ended
December 31, 2000 December 31, 1999 March 31, 1999 December 31, 1998
----------------- ----------------- -------------- -----------------
(in thousands)
Balance, beginning of year $ (16,949) $ (16,949) $ (36,449) $ (28,728)
Decrease in valuation allowance
related to permanent limitations
of net operating loss carryforwards 9,081 - 19,500 -
Increase in valuation
allowance charged to
income (10,395) - - (7,721)
---------------- --------------- --------------- ------------------
Balance, end of year $ (18,263) $ (16,949) $ (16,949) $ (36,449)
================ =============== =============== ==================
Under the provisions of pre-1984 life insurance tax regulations, NFL was taxed
on the lesser of taxable investment income or income from operations, plus
one-half of any excess of income from operations over taxable investment income.
One-half of the excess (if any) of the income from operations over taxable
investment income, an amount which was not currently subject to taxation, plus
special deductions allowed in computing the income from operations, were placed
in a special memorandum tax account known as the policyholders' surplus account.
The aggregate accumulation in the account at December 31, 2000, approximated
$2.5 million. Federal income taxes will become payable on this account at the
then current tax rate when and to the extent that the account exceeds a specific
maximum, or when and if distributions to stockholders, other than stock
dividends and other limited exceptions, are made in excess of the accumulated
previously taxed income. The Company does not anticipate any transactions that
would cause any part of the amount to become taxable and, accordingly, deferred
taxes which would approximate $0.9 million have not been provided on such
amount.
At December 31, 2000 and 1999, NFL has approximately $7.8 million and $8.0
million in its shareholders surplus account from which it could make
distributions to the Company without incurring any federal tax liability. The
amount of dividends which may be paid by NFL to the Company is limited by
statutory regulations.
At December 31, 2000, the Company and its wholly owned subsidiaries have
aggregate net operating loss carryforwards, net of bankruptcy related tax
attribute reductions of approximately $39.8 million for regular tax and $40.2
million for alternative minimum tax purposes, which will expire in 2003 through
2014.
NOTE 12 - STATUTORY CAPITAL AND SURPLUS
Under the applicable laws of the states in which insurance companies are
licensed, the companies are required to maintain minimum amounts of capital and
surplus. Effective September 28, 2000, NFL and FLICA redomesticated from the
states of Delaware and Mississippi, respectively, to the state of Texas. As a
result, NFL, FLICA, NFIC and AICT are Texas domestic companies and are subject
to regulation under Texas insurance laws. Under the Texas Insurance Code, the
insurance subsidiaries are required to maintain aggregate capital and surplus of
$1.4 million. The following states where the companies are licensed require
greater amounts of capital and surplus: California $1.5 million of capital and
$2.5 million of surplus, Washington $4.8 million of aggregate capital and
surplus, and Nebraska and Tennessee $1 million of capital and $1 million of
surplus. Accordingly, the minimum aggregate statutory capital and surplus which
NFL and NFIC must each maintain is $5.0 million. FLICA must maintain a minimum
of $4.8 million and AICT must maintain $2.0 million. At December 31, 2000,
aggregate statutory capital and surplus for NFL, FLICA, NFIC and AICT was
approximately $5.5 million, $6.0 million, $1.6 million and $3.6 million,
respectively. Although NFIC's capital and surplus is less than $5.0 million at
December 31, 1999, NFIC voluntarily ceased writing new business effective
December 15, 1997. Moreover, NFIC's capital and surplus exceeds the minimum
requirements of its state of domicile, Texas. AICT is wholly owned by NFIC.
Accordingly, statutory capital and surplus of NFIC includes the statutory
capital and surplus of AICT.
Dividends paid by the Insurance Subsidiaries are subject to the regulations of
the insurance laws and practices of the Texas Department of Insurance. The Texas
Insurance Code allows life and health insurance companies to make dividend
payments from surplus profits or earned surplus arising from its business.
Earned surplus is defined as unassigned surplus excluding any unrealized gains.
Texas life and health insurance companies may generally pay ordinary dividends
or make distributions of cash or other property within any twelve month period
with a fair market value equal to or less than the greater of 10% of surplus as
regards policyholders as of the preceding December 31 or the net gain from
operations for the twelve month period ending on the preceding December 31.
Dividends exceeding the applicable threshold are considered extraordinary and
require the prior approval of the Texas Insurance Commissioner.
The Insurance Subsidiaries are precluded from paying dividends during 2001
without prior approval of the Texas Insurance Commissioner as the companies'
earned surplus is negative. On September 30, 2000, NFL transferred its 100%
ownership of FLICA to Ascent through an extraordinary dividend approved by the
Texas Department of Insurance. Generally, all states require insurance companies
to maintain statutory capital and surplus that is reasonable in relation to
their existing liabilities and adequate to their financial needs. The Texas
Department of Insurance also maintains discretionary powers relative to the
declaration and payment of dividends based upon an insurance company's financial
position. In light of recent statutory losses incurred by the Insurance
Subsidiaries, the Company does not expect to receive any dividends from its
Insurance Subsidiaries for the foreseeable future.
In December 1990, the Company and NFL entered into an agreement under which NFL
issued a surplus certificate to the Company in the principal amount of
$2,863,000 in exchange for $2,863,000 of the Company's assets. The unpaid
aggregate principal under the surplus certificate bore interest at an agreed
upon rate not to exceed 10% and was repayable, in whole or in part, upon (i)
NFL's surplus exceeding $7,000,000, exclusive of any surplus provided by any
reinsurance agreements and (ii) NFL receiving prior approval for repayment from
the Delaware Insurance Commissioner. During 1993 and 1994, NFL received such
approval and repaid $2,086,000 to the Company. In 1999, with the prior approval
of the Delaware Insurance Commissioner, NFL converted the remaining $776,961 of
the surplus debenture to $600,000 of capital stock and $176,961 of paid in
surplus.
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or Health
Insurers Model Act (the "Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of statutory capital and surplus an
insurer must maintain in relation to its insurance and investment risks and
whether there is a need for possible regulatory attention. The Model Act (or
similar legislation or regulation) has been adopted in states where the
Insurance Subsidiaries are domiciled. The Model Act provides four levels of
regulatory attention, varying with the ratio of the insurance company's total
adjusted capital (defined as the total of its statutory capital and surplus,
asset valuation reserve and certain other adjustments) to its risk-based capital
("RBC"). If a company's total adjusted capital is less than 100 percent but
greater than or equal to 75 percent of its RBC, or if a negative trend (as
defined by the NAIC) has occurred and total adjusted capital is less than 125
percent of RBC (the "Company Action Level"), the company must submit a
comprehensive plan aimed at improving its capital position to the regulatory
authority proposing corrective actions. If a company's total adjusted capital is
less than 75 percent but greater than or equal to 50 percent of its RBC (the
"Regulatory Action Level"), the regulatory authority may take any action it
deems necessary, including placing the company under regulatory control. If a
company's total adjusted capital is less than 35 percent of its RBC (the
"Mandatory Control Level"), the regulatory authority must place the company
under its control. The NAIC's requirements are effective on a state by state
basis if, and when, they are adopted by the regulators in the respective states.
The Texas Department of Insurance adopted the NAIC's Model Act during 2000.
NFL's and FLICA's statutory annual statements for the year ended December 31,
2000 filed with the Texas Department of Insurance reflected total adjusted
capital in excess of Company Action Level RBC; however FLICA did not meet the
negative trend test (see Note 3).
In 1998, NFIC and AICT entered into a voluntary consent order, pursuant to
Article 1.32 of the Texas Insurance Code, providing for the continued monitoring
of the operations of NFIC and AICT by the Texas Department of Insurance in
response to losses sustained in 1997 and 1998 as well as the projected inability
to meet RBC requirements. Both NFIC and AICT ceased the sale and underwriting of
new business in 1998. At December 31, 2000, AICT's RBC exceeded Company Action
Level RBC; however, NFIC's RBC only exceeded Authorized Control Level RBC. Both
NFIC and AICT are in compliance with the terms of the voluntary consent order.
Under Florida Statutes Section 624.4095, Florida licensed insurance companies'
ratio of actual or projected annual written premiums to current or projected
surplus as regards to policyholders ("the premium writing ratio") may not exceed
specified levels for gross and net written premiums as defined by the statute.
If a company exceeds the premium writing ratio, the Florida Department of
Insurance shall suspend the company's certificate of authority in Florida or
establish by order maximum gross or net annual premiums to be written by the
company consistent with maintaining the ratios specified. At December 31, 2000,
the premium writing ratio for FLICA, which currently underwrites insurance
policies in Florida, exceeded the limit mandated by Florida law (see Note 3).
The statutory financial statements of the Insurance Subsidiaries are prepared
using accounting methods which are prescribed or permitted by the insurance
department of the respective companies' state of domicile. Prescribed statutory
accounting practices include a variety of publications of the NAIC as well as
state laws, regulations and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so prescribed.
NOTE 13 - EMPLOYEE BENEFIT PLANS
In September 1986, the Company established a retirement savings plan ("401(k)
plan") for its employees. As amended in August 1999, all employees are eligible
to participate in the 401(k) plan upon completion of six months of service. The
401(k) plan is qualified under Section 401(a) of the Internal Revenue Code
("IRC") and the trust established to hold the assets of the 401(k) plan is
tax-exempt under Section 501 (a) of the IRC. Ascent Assurance, Inc. is the plan
administrator, and may amend, terminate or suspend contributions to the plan at
any time it may deem advisable. Employees who elect to participate may
contribute up to 10% of pre-tax compensation, including commissions, bonuses and
overtime. The Company may make discretionary contributions, determined by the
Company's Board of Directors, up to 50% of the employees' first 3% of deferred
compensation. Certain IRC required limitations may be imposed for participants
who are treated as "highly compensated employees" for purposes of the IRC.
Participants vest 25% after one year of service, 50% after two years of service,
75% after three years of service and 100% after 4 years of service. Employee
contributions are invested in any of ten investment funds at the discretion of
the employee. Generally, the Company contributions are in the form of common
stock. During the period of July 1998 through October 1999, the Company made
cash contributions. The Company's contributions to the 401 (k) plan in 2000,
1999 and 1998 approximated $92,000, $96,000 and $80,000, respectively.
The Company's incentive stock option plans adopted as of July 1, 1982, September
5, 1985 and March 26, 1992, and the Company's restricted stock plan adopted as
of April 19, 1996, have been canceled as of the Effective Date. All outstanding
grants of stock options or restricted stock have been extinguished as
contemplated by the terms of the Plan.
1999 Stock Option Plan Pursuant to the Plan (see Note 4), on March 24, 1999, the
Company's Board of Directors adopted the 1999 Stock Option Plan (the "1999
Plan") in order to further and promote the interest of the Company, its
subsidiaries and its shareholders by enabling the Company and its subsidiaries
to attract, retain and motivate employees, non-employee directors and
consultants (including marketing agents) or those who will become employees,
non-employee directors and consultants (including marketing agents), and to
align the interests of those individuals and the Company's shareholders. To do
this, the 1999 Plan offers equity-based opportunities providing such employees
and consultants with a proprietary interest in maximizing the growth,
profitability and overall success of the Company and its subsidiaries.
The 1999 Plan became effective on the date of its adoption by the Company and
will remain in effect until December 31, 2008, except with respect to awards (as
that term is defined in the 1999 Plan) then outstanding, unless terminated or
suspended by the Board of Directors at that time. After such date no further
awards shall be granted under the 1999 Plan.
A summary of stock option activity is as follows:
Year Ended December 31,
2000 1999
------------------ -------------------
Outstanding at January 1 1,096,750 -
Granted 42,950 1,106,750
Exercised - -
Forfeited / Cancelled (195,100) (10,000)
------------------ -------------------
Outstanding at December 31 944,600 1,096,750
================== ===================
The weighted average option exercise price was $2.82 and $2.88 for options
outstanding at December 31, 2000 and 1999, respectively. The weighted average
option exercise price was $1.63 and $2.74, respectively, for options granted and
forfeited during 2000. For 1999, the weighted average option exercise price was
$2.85 for both options granted and forfeited.
The weighted average fair value of options granted during 2000 was $1.57. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following significant
weighted-average assumptions used for grants in 2000 and 1999, respectively:
dividend yield of 0% for both years; expected volatility of 1.839 and 1.142;
risk free interest rate of 6.57% for both years; expected life of 5 years for
both years.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because change in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Compensation cost recognized in the income statement for stock-based employee
compensation awards was $0.3 million for both 2000 and 1999.
If the fair value of the stock compensation granted had been accounted for under
FAS 123, the pro forma net loss for the year ended December 31, 2000 would have
been $(19.1) million or $(3.33) per basic share and diluted share. For the nine
months ended December 31, 1999, the pro forma net income would have been $2.0
million, or $(.05) per basic share and diluted share. For purposes of pro forma
disclosure, the estimated fair value of the stock compensation is amortized to
expense over the stock's vesting period. The effect on net income of the stock
compensation amortization for the year presented above is not likely to be
representative of the effects on reported net income for future years.
The following table summarizes information about the stock options outstanding
at December 31, 2000:
Weighted Average
Remaining Weighted Average
Exercise Prices Number Outstanding Contractual Life Exercise Price
- - --------------- ------------------ ---------------- --------------
$0.01 270,900 8.25 $0.01
$1.63 38,350 9.25 $1.63
$3.00 135,000 1.25 $3.00
$4.39 500,350 8.25 $4.39
--------------------- -------------------- ----------------
944,600 7.29 $2.82
===================== ==================== ================
There were no options exercisable at December 31, 2000.
NOTE 14 - REINSURANCE
The Insurance Subsidiaries cede insurance to other insurers and reinsurers on
both life and accident and health business. Reinsurance agreements are used to
limit maximum losses and provide greater diversity of risk. The Company remains
liable to policyholders to the extent the reinsuring companies are unable to
meet their treaty obligations. Total premiums ceded to other companies were $4.0
million, $2.6 million and $2.8 million for 2000, 1999 and 1998, respectively.
Face amounts of life insurance in force ceded approximated $12.6 million, $6.5
million and $7.3 million at December 31, 2000, 1999 and 1998, respectively.
The Company reinsures its risks under its Medical Expense policies on an excess
of loss basis so that its net payments on any one life insured under the policy
are limited for any one calendar year to $100,000. Risks under its Medicare
Supplement policies are not reinsured. The Company's risks under its Accidental
Death policies are one hundred percent (100%) reinsured. Under its life
insurance reinsurance agreement, FLICA and NFL retains fifty percent (50%) of
the coverage amount of each of its life insurance policies in force up to a
maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty,
a closed block of annually renewable term life insurance policies. NFL's
retention limit is $25,000 per year. In accordance with industry practice, the
reinsurance arrangements in force with respect to these policies are terminable
by either party with respect to claims incurred after the termination and
expiration dates.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
The Company's future minimum lease payments for non-cancelable operating leases,
relating primarily to office facilities and data processing equipment having a
remaining term in excess of one year, at December 31, 2000, aggregated $8.9
million. The amounts due by year are as follows: 2001 - $2.0 million; 2002 -
$2.0 million; 2003 - $1.6 million; 2004 - $1.0 million; 2005 - $0.9 million; and
thereafter - $1.4 million. Aggregate rental expense included in the consolidated
financial statements for all operating leases approximated $2.1 million, $2.4
million and $3.2 million in 2000, 1999 and 1998, respectively.
In the normal course of their business operations, the Insurance Subsidiaries,
continue to be involved in various claims, lawsuits (alleging actual as well as
substantial exemplary damages) and regulatory matters. In the opinion of
management, the disposition of these or any other legal matters will not have a
material adverse effect on the Company's business, consolidated financial
position or results of operations.
The Company's Insurance Subsidiaries are subject to extensive governmental
regulation and supervision at both federal and state levels. Such regulation
includes premium rate levels, premium rate increases, policy forms, minimum loss
ratios, dividend payments, claims settlement, licensing of insurers and their
agents, capital adequacy, transfer of control, and amount and type of
investments. Additionally, there are numerous health care reform proposals and
regulatory initiatives under consideration which if enacted could have
significant impact on the Company's results of operations.
NOTE 16 - RECONCILIATION TO STATUTORY REPORTING
A reconciliation of capital and surplus net income (loss) as reported on a
statutory basis by the Company's Insurance Subsidiaries to the Company's
consolidated GAAP stockholders' equity (deficit) and net income (loss) is as
follows:
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Consolidated statutory capital and surplus $ 13,014 $ 16,990 $ $17,937
Deferred acquisition costs 24,711 19,393 14,177
Future policy benefits and claims (14,338) (9,518) (9,521)
Unrealized gain (loss) on investments, net of tax (723) (2,585) 3,037
Income taxes - 3,363 -
Non-admitted assets 258 1,490 2,123
Asset valuation reserve 674 687 796
Interest maintenance reserve 780 1,251 1,380
Other (139) (273) 863
Non-insurance subsidiaries and eliminations (20,162) (7,014) (92,872)
-------------- --------------- --------------
GAAP stockholders' equity (deficit) $ 4,075 $ 23,784 $ (62,080)
============== =============== ==============
Year Ended December 31,
---------------------------------------------------
2000 1999 1998
(in thousands)
Consolidated statutory net income $ (16,956) $ (6,486) $ (8,108)
Deferred acquisition costs, net of amortization 6,818 5,217 (41)
Future policy benefits and claims (5,761) 228 806
Recognition of premium deficiency (1,500) - (4,948)
Income taxes (4,754) (4,366) 1,250
Other 261 (384) (468)
Non-insurance subsidiaries and eliminations 2,950 8,105 (10,776)
-------------- -------------- ---------------
GAAP net (loss) income $ (18,942) $ 2,314 $ (22,285)
============== ============== ===============
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for each of the Company's last two
years of operations is as follows:
Ascent
Quarter Ended
--------------------------------------------------------------------
March June September December
2000 2000 2000 2000
---- ---- ---- ----
Premium income $ 29,005 $ 29,228 $ 30,831 $ 30,844
Net investment income 2,078 2,266 2,626 2,771
Net realized gain (loss) on investments 17 (254) 28 (245)
Fee, service and other income 4,896 5,294 5,207 4,994
------------- -------------- -------------- --------------
Total revenues $ 35,996 $ 36,534 $ 38,692 $ 38,364
============= ============== ============== ==============
Loss before income taxes $ (1,258) $ (918) $ (1,193) $ (9,570)(1)
Net loss (830) (606) (787) (16,719)(2)
Preferred stock dividend 651 651 651 622
Loss applicable to common
stockholders (1,481) (1,257) (1,438) (17,341)
Loss per share:
Basic $ (0.23) $ (0.19) $ (0.22) $ (2.67)
Diluted $ (0.23) $ (0.19) $ (0.22) $ (2.67)
Westbridge Ascent
Quarter Ended Quarter Ended
--------------- -------------------------------------------------------
March June September December
1999 1999 1999 1999
---- ---- ---- ----
Premium income $ 29,948 $ 29,574 $ 28,512 $ 28,285
Net investment income 2,562 2,333 2,222 2,185
Net realized gain (loss) on investments 41 (63) (107) (38)
Fee, service and other income 4,263 4,196 4,506 4,367
--------------- --------------- --------------- ---------------
Total revenues $ 36,814 $ 36,040 $ 35,133 $ 34,799
=============== =============== =============== ===============
Income before income taxes $ 275 $ 1,622 $ 1,071 $ 538
Net income 208 1,054 707 345
Preferred stock dividend - 647 596 631
Income (loss) applicable to common
stockholders 208 407 111 (286)
Earnings (loss) per share:
Basic $ 0.03 $ 0.06 $ 0.02 $ (0.04)
Diluted $ 0.03 $ 0.06 $ 0.02 $ (0.04)
(1) Increase in losses for the fourth quarter of 2000 due to adverse claims
experience for major medical products (see Note 3) and recognition of
premium deficiency (see Note 10).
(2) Includes $10.4 million non-cash charge for increase in deferred tax asset
valuation allowance (see Note 11).
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
(in thousands)
December 31, December 31,
2000 1999
---- ----
Assets:
Cash $ 1,407 $ 4,027
Short-term investments 1,682 4,686
Fixed maturities, at market value 1,193 -
Investment in consolidated subsidiaries 37,168 45,021
Accrued investment income 29 3
Deferred tax assets - 646
Other assets 52 50
--------------- --------------
Total Assets $ 41,531 $ 54,433
=============== ==============
Liabilities:
Dividends payable $ - $ 1,874
Payable to subsidiaries 7,155 2,157
Other liabilities 2,596 3,361
--------------- --------------
Total Liabilities 9,751 7,392
--------------- --------------
Redeemable Convertible Preferred Stock 27,705 23,257
--------------- --------------
Stockholders' Equity:
Common stock 65 65
Capital in excess of par value 27,620 27,338
Accumulated other comprehensive loss, net of tax (2,324) (3,851)
Retained (Deficit) Earnings (21,286) 232
--------------- --------------
Total Stockholders' Equity 4,075 22,784
--------------- --------------
Total Liabilities, Redeemable Convertible
Preferred Stock and Stockholders' Equity $ 41,531 $ 54,433
=============== ==============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
(in thousands)
Year Nine Months
Ended Ended
December 31, December 31,
2000 1999
---- ----
Net investment income $ 308 $ 509
Realized gain (loss) on investments 24 (376)
Inter-company interest on Surplus Certificates - 58
Other Income - 3
--------------- -------------
332 194
--------------- -------------
Resolution of pre-confirmation contingencies - (1,235)
Inter-company interest on advances to subsidiaries 109 (22)
General and administrative expenses 218 (237)
Taxes, licenses and fees 119 (1)
--------------- -------------
446 (1,495)
--------------- -------------
Income before income taxes and equity in undistributed
net earnings of subsidiaries (114) 1,689
(Expense) benefit from income taxes (2,773) 629
--------------- -------------
(2,887) 2,318
Equity in undistributed net loss of subsidiaries (16,055) (212)
--------------- -------------
Net (loss) income (18,942) 2,106
Preferred stock dividends 2,576 1,874
--------------- -------------
(Loss) income applicable to common stockholders $ (21,518) $ 232
=============== =============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
(now ASCENT ASSURANCE, INC.)
CONDENSED STATEMENTS OF INCOME
(in thousands)
Three Months Year
Ended Ended
March 31, December 31,
1999 1998
---- ----
Net investment income $ 209 $ 1,090
Realized gains on investments 12 475
Inter-company income derived from:
Interest on Surplus Certificates 20 78
Rental of leasehold improvements and equipment - 397
Interest on advances to subsidiaries 110 254
Other income - 121
------------- -------------
351 2,415
------------- -------------
General and administrative expenses (112) 2,319
Reorganization expense - 7,856
Taxes, licenses and fees 24 45
Interest expense 507 5,933
------------- -------------
419 16,153
------------- -------------
Loss before income taxes and equity in undistributed
net earnings of subsidiaries and FHC (68) (13,738)
(Benefit from) provision for income taxes - (235)
------------- -------------
(68) (13,503)
Equity in undistributed net earnings (losses) of
subsidiaries and FHC 276 (8,782)
------------- -------------
Net income (loss) 208 (22,285)
Preferred stock dividends - 520
------------- -------------
Income (loss) applicable to common stockholders $ 208 $ (22,805)
============= =============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Nine Months
Ended Ended
December 31, December 31,
2000 1999
---- ----
Net (loss) income $ (18,942) $ 2,106
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during period, net
of tax 22 (245)
Reclassification adjustment of (gain) loss on sales of
investments included in net income, net of tax (16) 245
Other comprehensive income (loss) on investment in subsidiaries:
Unrealized holding gain (loss) arising during period, net of tax 1,805 (3,711)
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (284) (140)
-------------- ------------
Comprehensive loss $ (17,415) $ (1,745)
============== ============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
(now ASCENT ASSURANCE, INC.)
STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Year
Ended Ended
March 31, December 31,
1999 1998
---- ----
Net income (loss) $ 208 $ (22,285)
Other comprehensive income (loss):
Unrealized holding (loss) gain arising during period, net
of tax (331) 6
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (8) (308)
Other comprehensive income (loss) on investment in
subsidiaries:
Unrealized holding (loss) gain arising during period, net
of tax (1,628) 528
Reclassification adjustment of gain on sales of
investments included in net income, net of tax (19) (964)
-------------- -------------
Comprehensive loss $ (1,778) $ (23,023)
============== =============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except per share date)
Accumulated
Capital Other Retained Total
Common Stock in Excess Comprehensive (Deficit) Stockholders'
------------
Shares Amount of Par Value Loss Earnings Equity
------ ------ ------------ ---- -------- ------
Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103
Net income 2,106 2,106
Preferred stock dividend (1,874) (1,874)
Other comprehensive loss, net of tax (3,851) (3,851)
Amortization of unearned compensation 300 300
------------- -------- ------------- ------------ ---------- --------------
Balance at December 31, 1999 6,500,000 65 27,338 (3,851) 232 23,784
============= ======== ============= ============ ========== ==============
Net loss (18,942) (18,942)
Preferred stock dividend (2,576) (2,576)
Other comprehensive loss, net of tax 1,527 1,527
Amortization of unearned compensation 282 282
------------- -------- ------------- ------------ ----------- --------------
Balance at December 31, 2000 6,500,000 $ 65 $ 27,620 $ (2,324) $ (21,286) $ 4,075
============= ======== ============= ============ ============ ==============
The financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
SCHEDULE II
WESTBRIDGE CPAITAL CORP. (now ASCENT ASSURANCE, INC.) (PARENT COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except per share date)
Accumulated
Capital Other Retained Total
Common Stock in Excess Comprehensive (Deficit) Stockholders'
------------
Shares Amount of Par Value Income (Loss) Earnings Equity
Balance at December 31, 1997 6,195,439 $ 620 $ 30,843 $ 4,649 $ (81,530) $ (45,418)
Net loss (22,285) (22,285)
Preferred stock dividend (520) (520)
Other comprehensive loss, net of tax (302) (302)
Other comprehensive loss on investments
in subsidiaries, net of tax (436) (436)
Preferred stock converted to common 840,071 83 6,982 7,065
Other, net 299 - (184) (184)
-------------- ---------- ---------- -------------- ------------ -------------
Balance at December 31, 1998 7,035,809 $ 703 $ 37,641 $ 3,911 $ (104,335) $ (62,080)
============== ========== ========== ============== ============ =============
Net income $ $ $ $ 208 $ 208
Other comprehensive loss, net of tax (339) (339)
Other comprehensive loss on investments
in subsidiaries, net of tax (1,647) (1,647)
Cancellation of old preferred stock 11,935 (3,088) 8,847
Issuance of new preferred stock (477) (477)
Cancellation of old common stock (7,035,809) (703) (703)
Issuance of new common stock 6,500,000 65 79,203 79,268
Fresh start adjustments (101,741) (1,925) 107,692 4,026
-------------- ---------- ----------- -------------- ------------ -------------
Balance at March 31, 1999 6,500,000 $ 65 $ 27,038 $ - $ - $ 27,103
============== ========== =========== ============== ============ =============
The financial statements should be read in conjunction with the Consolidated
Financial Statements and the accompanying notes thereto.
SCHEDULE II
ASCENT ASSURANCE, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
(in thousands)
Year Nine Months
Ended Ended
December 31, December 31,
2000 1999
---- ----
Cash Flow From Operating Activities:
Net (loss) income $ (18,942) $ 2,106
Adjustments to reconcile net income to cash provided
by operating activities:
Equity in undistributed net income of subsidiaries 16,055 212
(Increase) decrease in accrued investment income (26) 168
Increase in deferred tax asset 646 (646)
Increase in other assets (2) (25)
Decrease in other liabilities (765) (3,048)
Increase in payables to subsidiaries 4,999 5,733
Dividends received from subsidiaries - 300
Other, net 1,685 (2,263)
------------- -------------
Net Cash Provided by Operating Activities 3,650 2,537
------------- -------------
Cash Flow From Investing Activities:
Proceeds from sale of fixed maturity investments 246 3,938
Cost of fixed maturity investments acquired (2,660) (699)
Proceeds from sale of equity securities - 873
Net change in short-term investments 3,004 (2,780)
Capital contributions to subsidiaries (6,860) (500)
------------- -------------
Net Cash (Used For) Provided by Investing Activities (6,270) 832
------------- -------------
Cash Flow From Financing Activities:
Net Cash Provided by Financing Activities - -
------------- -------------
(Decrease) increase in Cash During the Period (2,620) 3,369
Cash at Beginning of Period 4,027 658
------------- -------------
Cash at End of Period $ 1,407 $ 4,027
============= =============
The financial statement should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE II
WESTBRIDGE CAPITAL CORP. (PARENT COMPANY)
(now ASCENT ASSURANCE, INC.)
STATEMENT OF CASH FLOWS
(in thousands)
Three Months Year
Ended Ended
March 31, December 31,
1999 1998
---- ----
Cash Flows From Operating Activities:
Net income (loss) $ 208 $ (22,285)
Adjustments to reconcile net income (loss) to cash
used for operating activities:
Equity in undistributed net (income) loss of subsidiaries (276) 8,782
Depreciation expense - 89
Accrued investment income 42 75
Decrease (increase) in other assets 3,063 (1,062)
(Decrease) increase in other liabilities (13,102) 6,263
Increase in interest and dividend payable - 5,934
Other, net 9,589 595
-------------- ---------------
Net Cash Used For Operating Activities (476) (1,609)
-------------- ---------------
Cash Flows From Investing Activities:
Proceeds from sale of investments 2,455 5,176
Net change in short-term investments (1,403) 1,811
Additions to leasehold improvements and equipment,
net of retirements - (27)
(Increase) decrease in other assets - (283)
Capital contributions to subsidiaries (400) (6,321)
-------------- ---------------
Net Cash Provided by (Used For) Investing Activities 652 356
-------------- ---------------
Cash Flows From Financing Activities:
Retirement of senior subordinated debentures (15,167) -
Issuance of preferred stock 15,167 -
Decrease (increase) in other assets - 732
-------------- ---------------
Net Cash Provided by Financing Activities - 732
-------------- ---------------
Increase (decrease) in Cash During the Period 176 (521)
Cash at Beginning of Period 482 1,003
-------------- ---------------
Cash at End of Period $ 658 $ 482
============== ===============
The financial statements should be read in conjunction with the
Consolidated Financial Statements and the accompanying notes thereto.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Other
Policy
Deferred Claims Benefits Amortization
Policy Future and Net and of Policy Other
Acquisition Policy Benefits Premium Investment Claims Acquisition Operating Premiums
Segment Costs Benefits Payable Revenue Income Expense Costs Expenses Written*
- - ------------------------------ ----------- ---------- ---------- --------- ---------- ---------- ------------ --------- --------
ASCENT ASSURANCE, INC.
Year Ended December 31, 2000:
Insurance operations $ 23,853 $ 61,306 $ 42,778 $119,908 $ 7,387 $ 101,940 $ 2,998 $ 42,575 $ 120,667
=========
Other activities 858 - - - 2,046 - - 24,771
Corporate (parent company) - - - - 308 - - 337
----------- ---------- ---------- --------- ---------- ---------- ------------ ---------
Total $ 24,711 $ 61,306 $ 42,778 $119,908 $ 9,741 $ 101,940 $ 2,998 $ 67,683
=========== ========== ========== ========= ========== ========== ============ =========
Nine Months Ended December 31, 1999
Insurance operations $ 19,393 $ 57,119 $ 38,776 $ 86,371 $ 5,223 $ 65,699 $ 1,478 $ 26,488 $ 85,694
=========
Other activities - - - - 1,008 - - 10,549
Corporate (parent company) - - - - 509 - - (1,473)
----------- ---------- ---------- --------- ---------- ---------- ------------ ---------
Total $ 19,393 $ 57,119 $ 38,776 $ 86,371 $ 6,740 $ 65,699 $ 1,478 $ 35,564
=========== ========== ========== ========= ========== ========== ============ =========
WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, 1999:
Insurance operations $ 15,039 $ 54,738 $ 41,068 $ 29,948 $ 1,987 $ 21,799 $ 286 $ 10,402 $ 23,878
=========
Other activities - - - - 366 - - 3,633
Corporate (parent company) - - - - 209 - - 419
----------- ---------- ---------- --------- ---------- ---------- ------------ ---------
Total $ 15,039 $ 54,738 $ 41,068 $ 29,948 $ 2,562 $ 21,799 $ 286 $ 14,454
=========== ========== ========== ========= ========== ========== ============ ==========
Year Ended December 31, 1998:
Insurance operations $ 14,177 $ 53,871 $ 44,116 $135,717 $ 8,314 $ 99,419 $ 4,411 $ 44,447 $ 132,781
=========
Other activities - - - - 2,607 - - 24,274
Corporate (parent company) - - - - 1,090 - - 16,153
----------- ---------- ---------- --------- ---------- ---------- ------------ ----------
Total $ 14,177 $ 53,871 $ 44,116 $135,717 $ 12,011 $ 99,419 $ 4,411 $ 84,874
=========== ========== ========== ========= ========== ========== ============ ==========
* Premiums Written - Amounts do not apply to life insurance/other.
SCHEDULE IV
REINSURANCE
(in thousands, except percentages)
Percentage of
Ceded to Assumed Amount
Gross Other From Other Net Assumed to
Amount Companies Companies Amount Net
--------------- --------------- --------------- --------------- ---------------
ASCENT ASSURANCE, INC.
Year Ended December 31, 2000
Life insurance in force $ 46,744 $ 12,553 $ - $ 34,191 -
=============== =============== =============== ===============
Premiums:
Life $ 497 $ 12 $ - $ 485 -
Accident and health 121,601 3,939 1,257 118,919 1.05%
Other 504 - - 504 -
--------------- --------------- --------------- ---------------
Total premiums $ 122,602 $ 3,951 $ 1,257 $ 119,908 1.05%
=============== =============== =============== ===============
Nine Months Ended December 31, 1999
Life insurance in force $ 38,184 $ 6,465 $ - $ 31,719 -
=============== =============== =============== ===============
Premiums:
Life $ 396 $ 12 $ - $ 384 -
Accident and health 86,794 1,849 1,042 85,987 1.21%
--------------- --------------- --------------- ---------------
Total premiums $ 87,190 $ 1,861 $ 1,042 $ 86,371 1.21%
=============== =============== =============== ===============
WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, 1999
Life insurance in force $ 43,157 $ 7,072 $ - $ 36,085 -
=============== =============== =============== ===============
Premiums:
Life $ 147 $ 2 $ - $ 145 -
Accident and health 30,041 722 484 29,803 1.62%
--------------- --------------- --------------- ---------------
Total premiums $ 30,188 $ 724 $ 484 $ 29,948 1.62%
=============== =============== =============== ===============
Year Ended December 31, 1998
Life insurance in force $ 44,815 $ 7,275 $ - $ 37,540 -
=============== =============== =============== ===============
Premiums:
Life $ 664 $ 22 $ - $ 642 -
Accident and health 136,291 2,812 1,596 135,075 1.18%
--------------- --------------- --------------- ---------------
Total premiums $ 136,955 $ 2,834 $ 1,596 $ 135,717 1.18%
=============== =============== =============== ===============
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Additions
(Reductions)
Balance at Charged to Balance at
Beginning Costs and Deductions End Of
of Period Expenses (Charge Offs) Other* Period
---------------- ---------------- ------------------- ------------------- ---------------
ASCENT ASSURANCE, INC.
Year Ended December 31, 2000:
Allowance for doubtful agents'
balances $ 6,060 $ (722) $ (1,627) $ - $ 3,711
================ ================ =================== =================== ===============
Nine Months Ended December 31, 1999:
Allowance for doubtful agents'
balances $ 5,125 $ 123 $ (1,356) $ 2,168 $ 6,060
================ ================ =================== =================== ===============
WESTBRIDGE CAPITAL CORP.
Three Months Ended March 31, 1999:
Allowance for doubtful agents'
balances $ 5,176 $ 195 $ (246) $ - $ 5,125
================ ================ =================== =================== ===============
Year Ended December 31, 1998:
Allowance for doubtful agents'
balances $ 4,531 $ 645 $ - $ - $ 5,176
================ ================ =================== =================== ===============
* Represents reclassification of allowance netted against receivable.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to directors and executive officers is incorporated herein
by reference to "Election of Directors" and "Certain Information Regarding the
Executive Officers" from the Company's definitive proxy statement for the 2001
Annual Meeting of Stockholders, which will be filed on or before April 30, 2001.
ITEM 11 - EXECUTIVE COMPENSATION
Executive compensation is incorporated herein by reference to "Election of
Directors -- Executive Compensation" from the Company's definitive proxy
statement for the 2001 Annual Meeting of Stockholders, which will be filed on or
before April 30, 2001.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to security ownership of certain beneficial owners and
management is incorporated herein by reference to "Principal Stockholders" and
"Election of Directors -- Security Ownership of Management" from the Company's
definitive proxy statement for the 2001 Annual Meeting of Stockholders, which
will be filed on or before April 30, 2001.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related transactions is
incorporated herein by reference to "Principal Stockholders" and "Election of
Directors" from the Company's definitive proxy statement for the 2001 Annual
Meeting of Stockholders, which will be filed on or before April 30, 2001.
PART IV
ITEM 14 - FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) The documents set forth below are filed as part of this report.
(1) Financial Statements:
Reference is made to ITEM 8, "Index to Financial Statements and Financial
Statement Schedules."
(2) Financial Statement Schedules:
Reference is made to ITEM 8, "Index to Financial Statements and Financial
Statement Schedules."
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the financial
statements or notes thereto.
(3) Exhibits:
The following exhibits are filed herewith. Exhibits incorporated by reference
are indicated in the parentheses following the description.
2.1 First Amended Plan of Reorganization of Westbridge Capital Corp. Under
Chapter 11 of the Bankruptcy Code, dated as of October 30, 1998
(incorporated by reference to Exhibit 2 to the Company's Form 8-K filed on
September 21, 1998).
2.2 Amended Disclosure Schedule Accompanying the First Amended Plan of
Reorganization of Westbridge Capital Corp. under Chapter 11 of the
Bankruptcy Code (incorporated by reference to Exhibit 2 to the Company's
Form 8-K filed on September 21, 1998).
2.3 Findings of Fact, Conclusions of Law, and Order confirming the First
Amended Plan of Reorganization of Westbridge Capital Corp. dated October
30, 1998, as modified (incorporated by reference to Exhibit 2 to the
Company's Form 8-K filed on December 29, 1998).
3.1 Second Amended and Restated Certificate of Incorporation of the Company
filed with the Secretary of State of Delaware on March 24, 1999
(incorporated by reference to Exhibit 3.1 to the Company's Form 8-A filed
on March 25, 1999).
3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999
(incorporated by reference to Exhibit 3.2 to the Company's Form 8-A filed
on March 25, 1999).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1
to the Company's Form 8-A filed on March 25, 1999).
4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement
(incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed
on March 25, 1999).
4.3 Form of Warrant Agreement dated as of March 24, 1999, between the Company
and LaSalle National Bank, as warrant agent (incorporated by reference to
Exhibit 4.3 to the Company's Form 8-A filed on March 25, 1999).
4.4 Form of Preferred Stock Certificate (incorporated by reference to Exhibit
4.4 to the Company's Annual Report on Form 10-K for the year ended December
31, 1998).
10.1 Credit Agreement dated as of June 6, 1997 between Westbridge Funding
Corporation and LaSalle National Bank (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.2 Guaranty Agreement dated as of June 6, 1997 by Westbridge Capital Corp. in
favor of LaSalle National Bank (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997).
10.3 Pledge Agreement dated as of June 6, 1997 between Westbridge Marketing
Corporation and LaSalle National Bank (incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997).
10.4 Security Agreement dated as of June 6, 1997 between Westbridge Funding
Corporation for the benefit of LaSalle National Bank (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.5 Second Amended and Restated Receivables Purchase and Sale Agreement, dated
as of June 6, 1997 between National Foundation Life Insurance Company,
National Financial Insurance Company, American Insurance Company of Texas,
Freedom Life Insurance Company of America, and Westbridge Funding
Corporation (incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10.6 Amended and Restated Non-Insurance Company Sellers Receivables Purchase and
Sale Agreement, dated as of June 6, 1997 between American Senior Security
Plans, L.L.C., Freedom Marketing, Inc., Health Care-One Insurance Agency,
Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of
Texas, Inc., and Westbridge Marketing Corporation (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997).
10.7 Lock-Up Agreement, dated as of September 16, 1998, by and among the Company
and Credit Suisse First Boston Corporation (incorporated by reference to
Exhibit 10.1 to the Company's Form 8-K filed on September 21, 1998).
10.8 Stock Purchase Agreement, dated as of September 16, 1998, between the
Company and Credit Suisse First Boston Corporation (incorporated by
reference to Exhibit 10.2 to the Company's Form 8-K filed on September 21,
1998).
10.9 Employment Agreement, dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell
(incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed
on September 21, 1998).
10.10Employment Agreement dated as of September 15, 1998, by and among the
Company, Westbridge Management Corp. and Mr. Patrick H. O'Neill
(incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed
on September 21, 1998).
10.11First Amendment and Waiver to Credit Agreement among Westbridge Funding
Corporation, Westbridge Capital Corp. and LaSalle National Bank dated as of
September 8, 1998 (incorporated by reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1998).
10.12First Amendment to Guaranty Agreement dated as of March 24, 1999 between
Westbridge Capital Corp. in favor of LaSalle National Bank (incorporated by
reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.13Registration Rights Agreement dated as of March 24, 1999 between the
Company and Special Situations Holdings, Inc. - Westbridge (incorporated by
reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998).
10.141999 Stock Option Plan dated as of March 24, 1999 (incorporated by
reference to the Company's Schedule 14A filed with the Commission on April
30, 1999).
10.15Installment Note Agreement dated July 20, 1999 between Ascent Management,
Inc. and LaSalle Bank National Association (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999).
10.16Second Amendment to Credit Agreement dated August 12, 1999 between Ascent
Funding, Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.17Second Amendment to Guaranty Agreement dated July 20, 1999 between Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999).
10.18Third Amendment to Guaranty Agreement dated April 17, 2000 between Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000).
10.19Extension of Employment Agreement, dated as of September 15, 1998, by and
among the Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell
(incorporated by reference to Exhibit 10.8 to the company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000).
10.20Extension of Employment Agreement, dated as of September 15, 1998, by and
among the Company, Westrbridge Management Corp. and Mr. Patrick H. O'Neill
(incorporated by reference to Exhibit 10.9 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000).
10.21Fourth Amendment to Guaranty Agreement dated August 10, 2000 between Ascent
Assurance, Inc. and LaSalle Bank National Association (incorporated by
reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000).
10.22First Amendment to Pledge Agreement, dated as of November 30, 2000, by and
among Ascent Assurance, Inc. and LaSalle Bank National Association.
10.23Fifth Amendment to Guaranty Agreement, dated as of November 30, 2000, by
and among Ascent Assurance, Inc. and LaSalle Bank National Association.
10.24Third Amendment to Credit Agreement, dated as of November 30, 2000, by and
among Ascent Funding, Inc. and LaSalle Bank National Association.
10.25First Amendment to Security Agreement, dated as of November 30, 2000, by
and among Ascent Management, Inc. and LaSalle Bank National Association.
21.1* List of Subsidiaries of Ascent Assurance, Inc.
24.1* Consent of PricewaterhouseCoopers LLP
(b) Report on Form 8-K.
No reports on Form 8-K were filed during the year ended December 31, 2000.
- - ------------------------
* Filed Herewith.
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, on the 17th day of April,
2001.
ASCENT ASSURANCE, INC.
/s/ Cynthia B. Koenig
--------------------------------------------------
Cynthia B. Koenig
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the 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 date indicated.
SIGNATURE TITLE DATE
- - --------------------------- --------------------------------- ---------------
/s/ Patrick J. Mitchell Director, Chairman of the Board April 17, 2001
- - ---------------------------
(Patrick J. Mitchell) and Chief Executive Officer
(Principal Executive Officer)
/s/ John H. Gutfreund Director April 17, 2001
- - ---------------------------
(John H. Gutfreund)
/s/ Richard H. Hershman Director April 17, 2001
- - ---------------------------
(Richard H. Hershman)
/s/ Michael A. Kramer Director April 17, 2001
- - ---------------------------
(Michael A. Kramer)
/s/ Robert A. Peiser Director April 17, 2001
- - ---------------------------
(Robert A. Peiser)
/s/ James K. Steen Director April 17, 2001
- - ---------------------------
(James K. Steen)
/s/ Paul E. Suckow Director April 17, 2001
- - ---------------------------
(Paul E. Suckow)
INDEX OF EXHIBITS
Exhibit
Number Description of Exhibit
21.1* List of Subsidiaries of Ascent Assurance, Inc.
24.1* Consent of PricewaterhouseCoopers LLP
27.1* Financial Data Schedule.
* Filed Herewith
Exhibit 21.1
SUBSIDIARIES OF ASCENT ASSURANCE, INC.
Percentage Subsidiary Ownership
1. National Foundation Life Insurance Company (Texas) 100%
2. American Insurance Company of Texas (Texas) 100%
3. National Financial Insurance Company (Texas) 100%
4. Freedom Life Insurance Company of America (Texas) 100%
5. Freedom Holding Company (Kentucky) 100%
6. Ascent Funding, Inc. (Delaware) 100%
7. Foundation Financial Services, Inc. (Nevada) 100%
8. NationalCare(R)Marketing, Inc. (Delaware) 100%
9. Westbridge Printing Services, Inc. (Delaware) 100%
10. Ascent Management, Inc. (Delaware) 100%
11. Ascent Financial, Inc. (Delaware) 100%
12. Precision Dialing Services, Inc. (Delaware) 100%
13. Senior Benefits, LLC (Arizona) 100%
14. American Senior Security Plans, LLC (Delaware) 100%
15. LifeStyles Marketing Group, Inc. (Delaware) 100%
16. Health Care-One Insurance Agency, Inc. (California) 50%
17. Pacific Casualty Company, Inc. (Hawaii) 100%
18. HPI Marketing, Inc. (Delaware) 100%
Exhibit 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-82155) of Ascent Assurance, Inc. and its
subsidiaries of our reports dated April 17, 2001 and March 29, 2000 appearing on
pages 27 and 28 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Dallas, Texas
April 17, 2001
- - --------
(1) Includes operations of FLICA's parent, FHC, from June 1, 1996.
(1) Excludes interest on receivables from agents of $1.9 million, $1.3 million
and $2.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively.