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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
Exchange Act Of 1934
For the transition period from to
------------------ ------------------
COMMISSION FILE NUMBER 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 661-1111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, outstanding as of July 31, 2002: 12,889,898 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2002 and December 31, 2001.........................................................3
Condensed Consolidated Statements of Operations
Three months ended June 30, 2002 and 2001; Six months ended June 30, 2002 and 2001..........4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001.....................................................5
Notes to Condensed Consolidated Financial Statements
June 30, 2002...............................................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................17
Item 4. Submission of Matters to a Vote of Security Holders................................................18
Item 6. Exhibits and Reports on Form 8-K...................................................................19
Signatures.......................................................................................................20
Exhibit Index..................................................................................................EX-1
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(THOUSANDS, EXCEPT SHARE DATA) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 257,361 $ 269,753
Equity securities-preferred - 722
Fixed maturity securities held to maturity, at amortized cost 4,305 4,286
Trading securities, at fair value 754 517
- --------------------------------------------------------------------------------------------------------------------
Total investments 262,420 275,278
Cash and cash equivalents 14,407 24,975
Property and equipment, net 34,344 33,381
Goodwill, net 32,846 100,343
Other intangibles, net 3,225 3,591
Other assets 47,006 35,447
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 394,248 $ 473,015
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 131,950 $ 135,504
Advance premiums 15,426 16,737
Payables and accrued expenses 24,341 28,032
Notes payable 34,458 40,058
Other liabilities 22,715 23,284
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 228,890 243,615
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 12,844,898 outstanding at June 30, 2002,
16,654,315 issued and 13,955,439 outstanding at December 31, 2001) 16,654 16,654
Paid-in capital 189,232 187,927
Retained earnings (deficit) (8,957) 40,470
Accumulated other comprehensive income (net of tax expense of
$1,643 at June 30, 2002 and $1,024 at December 31, 2001) 3,051 1,903
Treasury stock (3,809,417 shares at June 30, 2002
and 2,698,876 shares at December 31, 2001, at cost) (34,622) (17,554)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 165,358 229,400
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 394,248 $ 473,015
====================================================================================================================
See Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(THOUSANDS, EXCEPT PER COMMON SHARE DATA) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 190,787 $ 213,645 $ 385,188 $ 436,115
Net investment income 3,799 4,405 7,723 8,919
Net realized investment gains (losses) 48 (152) 62 (179)
Other revenue 4,938 5,408 10,343 10,709
- --------------------------------------------------------------------------------------------------------------------
Total revenues 199,572 223,306 403,316 455,564
EXPENSES
Medical and other benefits 129,191 156,174 260,991 322,754
Selling, general and administrative 61,028 62,873 123,052 134,284
Interest expense 463 744 957 1,620
Amortization of goodwill and intangibles 182 907 365 1,814
- --------------------------------------------------------------------------------------------------------------------
Total expenses 190,864 220,698 385,365 460,472
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
effect of a change in accounting principle 8,708 2,608 17,951 (4,908)
Income tax expense (benefit) 3,467 1,142 7,280 (1,234)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a
change in accounting principle 5,241 1,466 10,671 (3,674)
Cumulative effect of a change in accounting
principle - - (60,098) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,241 $ 1,466 $ (49,427) $ (3,674)
====================================================================================================================
Earnings (loss) per common share - basic:
Income (loss) before cumulative effect of a
change in accounting principle $ 0.42 $ 0.10 $ 0.81 $ (0.26)
Cumulative effect of a change in accounting
principle - - (4.55) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.42 $ 0.10 $ (3.74) $ (0.26)
====================================================================================================================
Earnings (loss) per common share - diluted:
Income (loss) before cumulative effect of a
change in accounting principle $ 0.38 $ 0.10 $ 0.76 $ (0.26)
Cumulative effect of a change in accounting
principle - - (4.27) -
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.38 $ 0.10 $ (3.51) $ (0.26)
====================================================================================================================
See Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
June 30, June 30,
(THOUSANDS) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net loss $ (49,427) $ (3,674)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Cumulative effect of a change in accounting principle 60,098 -
Depreciation and amortization 4,410 5,071
Net realized investment (gains) losses (62) 179
Increase in trading securities (237) (72)
Deferred income tax benefit (8,457) (1,891)
Changes in operating accounts:
Other assets 4,751 4,891
Medical and other benefits payable (3,554) (13,459)
Advance premiums (1,311) (1,428)
Payables and accrued expenses (3,691) 7,145
Other liabilities 828 (238)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,348 (3,476)
INVESTING ACTIVITIES
Purchases of available for sale securities (94,875) (66,407)
Proceeds from sale of available for sale securities 107,747 67,593
Proceeds from maturity of available for sale securities 1,500 4,750
Purchases of held to maturity securities (1,925) -
Proceeds from maturity of held to maturity securities 1,925 -
Purchases of property and equipment (4,461) (3,697)
Proceeds from sale of property and equipment 6 -
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 9,917 2,239
FINANCING ACTIVITIES
Issuance of common stock 1,307 -
Purchase of treasury stock (19,540) (1,646)
Repayment of notes payable (5,600) (600)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (23,833) (2,246)
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Net decrease (10,568) (3,483)
Balance at beginning of year 24,975 15,606
- --------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 14,407 $ 12,123
====================================================================================================================
See Notes to Condensed Consolidated Financial Statements
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States ("GAAP") for complete financial statements.
Certain reclassifications have been made to the 2001 financial information to
conform to the 2002 presentation. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the American
Medical Security Group, Inc. ("AMSG" or the "Company") annual report on Form
10-K for the year ended December 31, 2001.
2. NEW ACCOUNTING STANDARD
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement 142").
Statement 142 impacts the Company in two ways. First, goodwill is no longer
amortized. Second, goodwill is subject to an initial impairment test in
accordance with Statement 142, and any remaining balance of goodwill will be
subject to future annual impairment testing.
The impairment test is comprised of two steps. The first step identifies
potential goodwill impairment by comparing an estimate of the fair value of the
applicable reporting unit to its carrying value, including goodwill. If the
carrying value exceeds fair value, a second step is performed. The second step
measures the amount of goodwill impairment, if any, by comparing the implied
fair value of the applicable reporting unit's goodwill with the carrying amount
of that goodwill. The Company completed both steps of the initial goodwill
impairment test during the second quarter of 2002 with the assistance of outside
valuation consultants. As a result of this impairment test, the Company
recognized a non-cash goodwill impairment charge of approximately $60.1 million,
or $4.27 per diluted share. The impairment charge is recorded as a cumulative
effect of a change in accounting principle as of January 1, 2002, and therefore
impacts the previously reported results for the first quarter of 2002 and
results for the six months ended June 30, 2002. The impairment charge has no
impact on cash flows or the statutory-basis capital and surplus of the Company's
insurance subsidiaries. As of June 30, 2002, goodwill for the health, life and
all other reporting units was $12.7 million, $19.4 million and $0.7 million,
respectively. Subsequent impairment tests will be performed at least annually,
and future goodwill impairments, if any, will be classified as operating
expenses in the Company's statement of operations.
The Company's measurement of fair value was based on an evaluation of ranges of
future discounted cash flows, public company trading multiples and market
comparisons of similar assets and liabilities. This evaluation utilized
assumptions and projections based on the best information available to
management. Certain key assumptions considered included forecasted trends in
membership, revenue, medical costs, operating expenses and effective tax rates.
6
The following table illustrates net income (loss) and net income (loss) per
share adjusted to exclude the effects of amortizing goodwill:
Three Months Six Months
Ended Ended
June 30, June 30, Year Ended December 31,
----------------------------- ---------------------------------
(THOUSANDS, EXCEPT PER COMMON SHARE DATA) 2001 2001 2001 2000 1999
- ----------------------------------------------------------------------------------- ---------------------------------
Reported net income (loss) $ 1,466 $ (3,674) $ 4,175 $ 2,669 $ (25,946)
Add back: goodwill amortization 671 1,342 2,685 2,685 2,827
- ----------------------------------------------------------------------------------- ---------------------------------
Adjusted net income (loss) $ 2,137 $ (2,332) $ 6,860 $ 5,354 $ (23,119)
=================================================================================== =================================
Basic earnings (loss) per common share:
Reported net income (loss) $ 0.10 $ (0.26) $ 0.30 $ 0.18 $ (1.58)
Goodwill amortization 0.05 0.10 0.19 0.18 0.17
- ----------------------------------------------------------------------------------- ---------------------------------
Adjusted net income (loss) $ 0.15 $ (0.17) $ 0.49 $ 0.36 $ (1.40)
=================================================================================== =================================
Diluted earnings (loss) per common share:
Reported net income (loss) $ 0.10 $ (0.26) $ 0.29 $ 0.18 $ (1.58)
Goodwill amortization 0.05 0.10 0.19 0.18 0.17
- ----------------------------------------------------------------------------------- ---------------------------------
Adjusted net income (loss) $ 0.15 $ (0.17) $ 0.48 $ 0.36 $ (1.40)
=================================================================================== =================================
3. EARNINGS (LOSS) PER COMMON SHARE ("EPS")
Basic EPS are computed by dividing net income (loss) by the weighted average
number of common shares outstanding. Diluted EPS are computed by dividing net
income (loss) by the weighted average number of common shares outstanding,
adjusted for the effect of dilutive stock options.
The following table illustrates the computation of EPS for income (loss) from
continuing operations and provides a reconciliation of the number of weighted
average basic and diluted shares outstanding:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(THOUSANDS, EXCEPT PER COMMON SHARE DATA) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) before cumulative effect
of a change in accounting principle $ 5,241 $ 1,466 $ 10,671 $ (3,674)
====================================================================================================================
Denominator:
Denominator for basic EPS 12,615 14,042 13,206 14,126
Effect of dilutive employee stock options 1,066 52 879 -
- --------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS 13,681 14,094 14,085 14,126
====================================================================================================================
Earnings (loss) per common share
before cumulative effect of a change
in accounting principle:
Basic $ 0.42 $ 0.10 $ 0.81 $ (0.26)
Diluted $ 0.38 $ 0.10 $ 0.76 $ (0.26)
====================================================================================================================
The effect of dilutive securities was excluded from the diluted earnings (loss)
per common share computation for the six months ended June 30, 2001 because the
Company had a loss before cumulative effect of a change in accounting principle
in this period; therefore, their inclusion would have been antidilutive. Certain
options to purchase shares were not included in the computation of diluted
earnings (loss) per common share because the options' exercise prices were
greater than the average market price of the outstanding common shares for the
period.
7
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income (loss) plus or minus other
comprehensive income (loss). For the Company, under existing accounting
standards, other comprehensive income (loss) includes unrealized gains and
losses, net of income tax effects, on certain investments in debt and equity
securities. Comprehensive income (loss) for the Company is calculated as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,241 $ 1,466 $ (49,427) $ (3,674)
Unrealized gain (loss) on available
for sale securities 3,125 (404) 1,148 2,988
- --------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 8,366 $ 1,062 $ (48,279) $ (686)
====================================================================================================================
5. CREDIT AGREEMENT
At June 30, 2002, the Company maintained a revolving bank line of credit
agreement with an outstanding balance and maximum commitment of $30.2 million.
At December 31, 2001, the outstanding balance and maximum commitment under the
credit agreement was $35.2 million. The credit agreement contains customary
covenants which, among other matters, require the Company to achieve minimum
financial results and restrict the Company's ability to incur additional debt,
pay future cash dividends and dispose of assets outside the ordinary course of
business. The Company's obligations under the credit agreement are guaranteed by
its subsidiary, American Medical Security Holdings, Inc. ("AMS Holdings"), and
secured by pledges of stock of AMS Holdings and United Wisconsin Life
Insurance Company ("UWLIC"), the Company's principle insurance subsidiary.
The credit agreement contains a clause requiring an amendment in the event any
changes in accounting principles result in a material variation in the method of
calculation of financial covenants or other terms of the credit agreement. The
intention of the amendment is to equitably reflect such accounting changes in
order that the criteria for evaluating the Company's financial condition will be
the same after the accounting change as if the change had not occurred. The
Company's credit agreement was amended in August 2002 to reflect the accounting
change described in Note 2.
6. CONTINGENCIES
In February 2000, a class action lawsuit was filed against the Company in the
state of Florida alleging the Company did not follow Florida law when it
discontinued writing certain health insurance policies and offered new policies
in 1998. Plaintiffs claim the Company wrongfully terminated coverage, improperly
notified insureds of conversion rights and charged improper premiums for new
coverage. Plaintiffs also alleged that the Company's renewal rating methodology
violates Florida law. Plaintiffs are seeking damages unspecified in the
complaint. A bench trial on the liability issues of the case was held in March
2002. On April 24, 2002, a judgment was rendered against the Company. The
damages portion of the lawsuit is expected to be heard before a jury in
September 2002.
In a separate administrative proceeding based on similar facts with similar
issues, the Florida Department of Insurance issued an administrative complaint
against the Company in May 2001, challenging the Company's rating and other
practices in Florida relating to the Company's MedOne products for individuals
and families. MedOne products sold by the Company in Florida are written
pursuant to a group master policy issued to an association domiciled in a state
other than Florida. In a recommended order entered April 25, 2002, the
Administrative Law Judge found in favor of the Company and held that the
evidence presented by the Florida Department of Insurance did not support a
conclusion that the Company had violated any provisions of the Florida insurance
statutes or regulations. The Administrative Law Judge recommended that all
counts of the administrative complaint be dismissed. The recommended order was
sent to the Commissioner of the Florida Department of Insurance for
8
entry of a final order. On July 24, 2002, the Florida Department of Insurance
issued a final order affirming the recommendations from the Administrative Law
Judge with respect to six of eight counts. Among other things, the final order
affirmed that the policy issued to the association was exempt from most Florida
rating requirements. However, the Department reversed the Administrative Law
Judge's finding that tier rating does not violate state law applicable to
policies issued out of state, and ordered the suspension of the Company's
license to sell new business in Florida for one year. The Department's order
specifically permits the Company to continue to renew its existing business in
Florida. On July 29, 2002, the First District Court of Appeals for the State of
Florida stayed the order of the Florida Department of Insurance. The stay is
effective until the Court of Appeals rules on the Company's request to overturn
the order. The Company anticipates a reversal of the final order on appeal. On
July 29, 2002, the Company announced that beginning November 1, 2002, it will
voluntarily implement a block rating system for its MedOne business in Florida
and discontinue its tier rating system in that state.
The Company is involved in the foregoing and various other legal and regulatory
actions occurring in the normal course of business. These actions include
threatened and actual challenges to the Company's tier rating methodology. Based
on current information including consultation with outside counsel, management
believes any ultimate liability that may arise from the above-mentioned and all
other legal and regulatory actions would not materially affect the Company's
consolidated financial position or results of operations. However, management's
evaluation of the likely impact of these actions could change in the future and
an unfavorable outcome could have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flow of a future
period.
7. SEGMENT INFORMATION
The Company has two reportable segments: 1) health insurance products; and 2)
life insurance products. The Company's health insurance products consist of the
following coverages related to preferred provider organization products: MedOne
(for individuals and families) and small group medical, self funded medical,
dental and short-term disability. Life products consist primarily of group
term-life insurance. The "All Other" category includes operations not directly
related to the business segments and unallocated corporate items (i.e.,
corporate investment income, interest expense on corporate debt, amortization of
goodwill and intangibles and unallocated overhead expenses). The Company's All
Other segment also includes data for its health maintenance organization ("HMO")
subsidiary. The reportable segments are managed separately because they differ
in the nature of the products offered and in profit margins.
The Company evaluates segment performance based on income or loss before income
taxes, excluding gains and losses on the Company's investment portfolio. The
accounting policies of the reportable segments are the same as those used to
report the Company's consolidated financial statements. Intercompany
transactions have been eliminated prior to reporting segment information.
A reconciliation of segment income (loss) before income taxes to consolidated
income (loss) before income taxes is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
(THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Health segment $ 8,110 $ 1,321 $ 16,452 $ (7,185)
Life segment 1,512 1,598 2,935 3,348
All other (914) (311) (1,436) (1,071)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 8,708 $ 2,608 $ 17,951 (4,908)
====================================================================================================================
9
Operating results and statistics for each of the Company's segments are as
follows:
Three Months Ended Six Months Ended
HEALTH SEGMENT June 30, June 30,
--------------------------------------------------------------
(THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 187,314 $ 209,124 $ 378,034 $ 426,098
Net investment income 1,809 2,265 3,743 4,715
Other revenue 4,063 4,357 8,523 8,587
- --------------------------------------------------------------------------------------------------------------------
Total revenues 193,186 215,746 390,300 439,400
EXPENSES
Medical and other benefits 128,185 154,981 258,749 319,178
Selling, general and administrative 56,891 59,444 115,099 127,407
- --------------------------------------------------------------------------------------------------------------------
Total expenses 185,076 214,425 373,848 446,585
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 8,110 $ 1,321 $ 16,452 $ (7,185)
====================================================================================================================
Loss ratio 68.4% 74.1% 68.4% 74.9%
Expense ratio 28.2% 26.3% 28.2% 27.9%
- --------------------------------------------------------------------------------------------------------------------
Combined ratio 96.6% 100.4% 96.6% 102.8%
====================================================================================================================
Health membership at end of period:
Fully insured medical 319,675 394,387
Self funded medical 43,058 45,462
Stand-alone dental 166,370 186,990
- -----------------------------------------------------------------------------------
Total health membership 529,103 626,839
===================================================================================
Three Months Ended Six Months Ended
LIFE SEGMENT June 30, June 30,
--------------------------------------------------------------
(THOUSANDS) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 3,473 $ 4,483 $ 7,151 $ 9,446
Net investment income 153 162 303 336
Other revenue 29 40 61 82
- --------------------------------------------------------------------------------------------------------------------
Total revenues 3,655 4,685 7,515 9,864
EXPENSES
Medical and other benefits 1,017 1,690 2,235 3,682
Selling, general and administrative 1,126 1,397 2,345 2,834
- --------------------------------------------------------------------------------------------------------------------
Total expenses 2,143 3,087 4,580 6,516
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 1,512 $ 1,598 $ 2,935 $ 3,348
====================================================================================================================
Loss ratio 29.3% 37.7% 31.3% 39.0%
Expense ratio 31.6% 30.3% 31.9% 29.1%
- --------------------------------------------------------------------------------------------------------------------
Combined ratio 60.9% 68.0% 63.2% 68.1%
====================================================================================================================
Life membership at end of period 166,857 211,547
==================================================================================
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary companies
(the "Company"), is a provider of individual and small employer group insurance
products. The Company's principal product offerings are health insurance for
small employer groups and health insurance products marketed to individuals and
families ("MedOneSM"). The Company also offers dental, life, prescription drug,
disability and accidental death insurance, and provides self funded benefit
administration. The Company markets its products in 32 states and the District
of Columbia through independent agents. The Company has approximately 75 sales
managers located in sales offices throughout the United States to support the
independent agents. The Company's products generally provide discounts to
insureds that utilize preferred provider organizations ("PPOs"). The Company
owns a preferred provider network and also contracts with other networks to
ensure cost-effective health care choices to its members.
RESULTS OF OPERATIONS
The Company reported net income of $5.2 million or $0.38 per diluted share for
the second quarter of 2002. This compares to net income of $1.5 million or $0.10
per share for the second quarter of 2001. For the six month period ended June
30, 2002, the Company reported income before cumulative effect of a change in
accounting principle of $10.7 million, compared with a net loss of $3.7 million
for the same period of the prior year. The improvement in profitability from the
prior year primarily reflects improvement in the small employer group loss ratio
and a change in accounting for goodwill and other intangible assets.
The improvement in the small employer group loss ratio is attributed to
management's strategic plan including increased premium rates on new and renewal
business, focused marketing efforts for small employer group products in markets
with the best prospects for profitability and future growth, and redesigned
products to meet the changing needs of today's insurance consumers.
Effective January 1, 2002, the Company adopted new rules on accounting for
goodwill and other intangible assets. The new rules impact the Company in two
ways. First, goodwill is no longer amortized. Second, goodwill is subject to an
initial impairment test in accordance with the new rules, and any remaining
balance of goodwill will be subject to future annual impairment testing. The
Company completed both steps of the initial goodwill impairment test during the
second quarter of 2002 with the assistance of outside valuation consultants. As
a result of this impairment test, the Company recognized a non-cash goodwill
impairment charge of approximately $60.1 million, which is classified as a
cumulative effect of a change in accounting principle as of January 1, 2002. The
impairment charge has no impact on cash flows or the statutory-basis capital and
surplus of the Company's insurance subsidiaries. Subsequent impairment tests
will be performed at least annually, and future goodwill impairments, if any,
will be classified as operating expenses in the Company's statement of
operations.
The second quarter 2001 results include goodwill amortization of $0.7 million or
$0.05 per share. See Note 2 to the Company's condensed consolidated financial
statements for further discussion regarding the impact of the accounting method
change.
11
INSURANCE PREMIUMS AND MEMBERSHIP
Insurance premiums for the three months ended June 30, 2002 decreased 10.7% to
$190.8 million from $213.6 million for the same period in 2001. For the six
month period ended June 30, 2002, insurance premiums decreased to $385.2 million
from $436.1 million for the same period in the prior year. The decrease
primarily resulted from a decline in membership in select unprofitable small
employer group markets and high lapse rates of existing membership in core
markets, partially offset by rising premium rates on the continuing block of
business. Average fully insured medical premium per member per month for the
second quarter of 2002 increased by 11.6% to $170, compared to the second
quarter of 2001, reflecting significant rate actions taken by the Company.
Total medical and dental membership declined from 626,867 members at June 30,
2001 to 529,103 members at June 30, 2002. The membership decrease is primarily
the result of the Company's efforts in terminating business in several
unprofitable markets. Premium rate increases resulting in lower new sales and
higher lapses on existing business also contributed to the membership decline.
The Company's MedOneSM product for individuals and families continues to grow as
a percentage of the Company's overall business reflecting management's strategy
to change the Company's mix of business. MedOneSM membership now accounts for
47% of the Company's medical membership in force. At the end of 2000 and 2001,
MedOneSM membership accounted for 34% and 45% of the Company's medical
membership in force, respectively. Management considers the MedOneSM product to
be a key strategic product and continues to take steps to accelerate membership
and premium growth in this market.
NET INVESTMENT INCOME
Net investment income for the three months ended June 30, 2002, including
realized investment gains and losses, decreased to $3.8 million from $4.3
million for the three months ended June 30, 2001. For the six month period ended
June 30, 2002, net investment income decreased to $7.8 million from $8.7 million
for the same period in the prior year. The decrease in net investment income is
due primarily to a decrease in the average annual investment yield. The average
annual investment yield was 5.9% for the second quarter of 2002 compared to 6.6%
for the second quarter of 2001.
LOSS RATIO
The health loss ratio for the second quarter of 2002 was 68.4% compared to 74.1%
for the second quarter of 2001. The health loss ratio for the six months ended
June 30, 2002 was 68.4% compared to 74.9% for the six months ended June 30,
2001. The health loss ratio has decreased sequentially for seven quarters. The
significant improvement was due to management's actions and strategies to
increase premium rates and combat the impact of medical inflation. These actions
included premium rate increases, claims cost control initiatives and the exit
from unprofitable small group markets. The reduction also reflects increased
sales of MedOne products, which are priced for a lower loss ratio but have
higher selling and administrative costs. As anticipated, claim costs per member
per month have increased slightly, but were surpassed by increased premiums per
member per month. Average premium per member per month for the second quarter of
2002 increased 11.6% compared with the second quarter of 2002. Average claims
costs increased only 4.2% over the same period. During the second quarter of
2002, the Company strengthened its reserve for litigation.
The life segment loss ratio for the three months ended June 30, 2002 was 29.3%
compared to 37.7% for the three months ended June 30, 2001. The life segment
loss ratio may fluctuate from quarter to quarter as actual life claims
experience fluctuates. The life segment loss ratio for the six months ended June
30, 2002 was 31.3% compared with 39.0% for the same period in 2001.
12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SG&A") expense ratio includes
commissions and selling expenses, administrative expenses (less other revenues),
and premium taxes and assessments. The SG&A expense ratio for health segment
products for the three months ended June 30, 2002 was 28.2%. This compares to
the second quarter of 2001 SG&A expense ratio of 26.3%. The SG&A expense ratio
has increased over the past two years. The increase largely reflects lower
premium volume and a product mix change driven by growth in the MedOneSM
business, which has higher selling and administrative costs but lower claim
costs than small employer group products.
During the second quarter of 2002, the Company incurred approximately $0.7
million of costs related to the previously disclosed secondary offering of the
Company's common stock owned by Blue Cross and Blue Shield United of Wisconsin,
a subsidiary of Cobalt Corporation.
OTHER MATTERS
In twenty-two states, the Company uses a methodology for computing renewal
premium for its MedOne products known as "tier rating." In ten states, the
Company uses a "block rating" methodology. The Company's tier rating methodology
has been the subject of significant adverse publicity and actual and threatened
litigation. See Part II Item 1, Legal Proceedings. Management believes that the
tier rating methodology is superior to the block rating methodology and that
tier rating is a legal rating methodology in all the states where it is used.
However, due to adverse publicity and misperceptions about tier rating, the
Company announced that by January 1, 2003, it will implement a block rating
system for all of its MedOne health benefit products in all states in which it
does business. Management believes the change will have no material effect on
future earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash flow consist primarily of insurance premiums,
administrative fee revenue and investment income. The primary uses of cash
include payment of medical and other benefits, SG&A expenses and debt service
costs. Positive cash flows are invested pending future payments of benefits and
other operating expenses. The Company's investment policies are designed to
maximize yield, preserve principal and provide liquidity to meet anticipated
payment obligations.
The Company's cash provided by operations was $3.3 million for the six months
ended June 30, 2002. This compares to cash used in operations of $3.5 million
for the six months ended June 30, 2001. The improvement in cash flow primarily
reflects increased profitability of the Company. Management expects cash
provided by operations for the full year 2002 to exceed the $17.6 million cash
provided by operations in 2001.
The Company's investment portfolio consists primarily of investment grade bonds
and has limited exposure to equity securities. At June 30, 2002 and December 31,
2001, greater than 99% of the Company's investment portfolio was invested in
bonds. The bond portfolio had an average quality rating of AA at June 30, 2002
and December 31, 2001, as measured by Standard & Poor's Corporation. The
majority of the bond portfolio was classified as available for sale. The Company
has no investment in mortgage loans, non-publicly traded securities (except for
principal only strips of U.S. Government securities), real estate held for
investment or financial derivatives.
The Company's principal insurance subsidiary, UWLIC, is domiciled in Wisconsin,
which requires certain minimum levels of regulatory capital and surplus and
which may restrict dividends to UWLIC's parent company. The Wisconsin
Commissioner of Insurance may disapprove any dividend which, together with other
dividends paid in the prior 12 months, exceeds the regulatory maximum, computed
as the lesser of 10% of statutory surplus or total statutory net gain from
operations as of the end of the preceding calendar year. Based upon UWLIC's
financial statements as of December 31, 2001, as filed with the insurance
regulators, and dividends paid in 2002, UWLIC is restricted from paying
dividends in 2002 without prior regulatory approval.
13
The National Association of Insurance Commissioners has adopted risk-based
capital ("RBC") standards for health and life insurers designed to evaluate the
adequacy of statutory capital and surplus in relation to various business risks
faced by such insurers. The RBC formula is used by state insurance regulators as
an early warning tool to identify insurance companies that potentially are
inadequately capitalized. At December 31, 2001, each of the Company's insurance
subsidiaries had RBC ratios that were substantially above the levels which would
require action by the Company or a regulator.
At June 30, 2002, the Company maintained a revolving bank line of credit
agreement with an outstanding balance and maximum commitment of $30.2 million.
At December 31, 2001, the outstanding balance and maximum commitment under the
credit agreement was $35.2 million. The credit agreement contains customary
covenants which, among other matters, require the Company to achieve minimum
financial results and restrict the Company's ability to incur additional debt,
pay future cash dividends and dispose of assets outside the ordinary course of
business. The Company's obligations under the credit agreement are guaranteed by
its subsidiary, American Medical Security Holdings, Inc. ("AMS Holdings"), and
secured by pledges of stock of AMS Holdings and UWLIC.
On March 19, 2002, the Company entered into a stock purchase agreement with
Cobalt Corporation ("Cobalt") and its wholly owned subsidiary, Blue Cross & Blue
Shield United of Wisconsin ("BCBSUW"), the Company's largest shareholder, to
repurchase 1.4 million shares of the Company's common stock owned by BCBSUW at a
total cost of $19.5 million, including related transaction costs. In conjunction
with the stock repurchase, BCBSUW completed the sale of 3,001,500 shares of the
Company's common stock in an underwritten secondary offering during the second
quarter of 2002. The public offering price was $18.00 per share. As a result of
these transactions, Cobalt's ownership of the Company was reduced from
approximately 45% at December 31, 2001 to approximately 15% at the end of the
second quarter of 2002.
CAUTIONARY FACTORS
This report and other documents or oral presentations prepared or delivered by
and on behalf of the Company contain or may contain "forward-looking statements"
within the meaning of the safe harbor provisions of the United States Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
statements based upon management's expectations at the time such statements are
made and are subject to risks and uncertainties that could cause the Company's
actual results to differ materially from those contemplated in the statements.
Readers are cautioned not to place undue reliance on the forward-looking
statements. When used in written documents or oral presentations, the terms
"anticipate," "believe," "estimate," "expect," "may," "objective," "plan,"
"possible," "potential," "project," "will" and similar expressions are intended
to identify forward-looking statements. In addition to the assumptions and other
factors referred to specifically in connection with such statements, factors
that could cause the Company's actual results to differ materially from those
contemplated in any forward-looking statements include, among others, the
following:
o Unexpected increases in health care costs resulting from advances in
medical technology, increased utilization of medical services and
prescription drugs resulting from bioterrorism or otherwise,
possible epidemics and natural or man-made disasters and other
factors affecting the delivery and cost of health care that are beyond
the Company's control. There are also known trends, such as the aging
of the population, that can have an uncertain effect on health care
costs.
o The Company's ability to distribute and sell its products profitably,
including its ability to retain key producing sales agents and maintain
satisfactory relationships with independent agents who sell the
Company's products, and the Company's ability to expand its
distribution network, generate new sales, retain existing members,
predict future health care cost trends and adequately price its
products, and control expenses during a time of declining revenue and
membership. Competitive factors such as the entrance of additional
competitors into the Company's markets and competitive pricing
practices also can have an uncertain effect on the Company's sales.
o Federal and state laws adopted in recent years, currently proposed,
such as the Patients' Bill of Rights, or that may be proposed in the
future, which affect or may affect the Company's operations, products,
14
profitability or business prospects. Reform laws adopted in recent
years generally limit the ability of the Company to use risk selection
as a method of controlling costs for its small employer group business.
o Regulatory factors, including delays in regulatory approvals of rate
increases and policy forms; regulatory action resulting from market
conduct activity and general administrative compliance with state and
federal laws; restrictions on the ability of the Company's subsidiaries
to transfer funds to the Company or its other subsidiaries in the form
of cash dividends, loans or advances without prior approval or
notification; the granting and revoking of licenses to transact
business; the amount and type of investments that the Company may hold;
minimum reserve and surplus requirements; and risk-based capital
requirements.
o Factors related to the Company's efforts to maintain an appropriate
medical loss ratio in its small employer group health and MedOne(SM)
health business, (including implementing significant rate increases,
terminating business in unprofitable markets, introducing redesigned
products and implementing a block rating methodology for the Company's
MedOne business), and the willingness of employers and individuals to
accept rate increases, premium repricing and redesigned products.
o The development of and changes in claims reserves.
o The effectiveness of the Company's strategy to expand sales of its
MedOne(SM) products for individuals and families, to focus its small
employer group health product sales in core markets and to grow its
ancillary products, including its dental, life, and self-funded benefit
administration business.
o The cost and other effects of legal and administrative proceedings
particularly as it relates to the Company's health insurance business,
including the expense of investigating, litigating and settling claims
or paying judgments against the Company which may include substantial
non-economic, treble or punitive damages; and the general increase in
litigation involving health insurers and the Company's rating
practices.
o Adverse outcomes of the Florida class action or other litigation in
excess of provisions made by the Company.
o The Company's ability to continue purchasing insurance policies in
connection with its risk management program at affordable rates, with
reasonable terms and deductibles and/or adequate policy limits.
o Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and
transfer assets.
o Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their A-
(Excellent) rating by A.M. Best.
o General economic conditions, including changes in employment, interest
rates and inflation that may impact the performance of the Company's
investment portfolio or decisions of individuals and employers to
purchase the Company's products.
o The Company's ability to maintain attractive preferred provider
networks for its insureds.
o Factors affecting the Company's ability to hire and retain key
executive, managerial, professional and technical employees.
o Changes in accounting principles and the effects related to such
changes.
o Other business or investment considerations that the Company may
disclose from time to time in its Securities and Exchange Commission
filings or in other publicly disseminated written documents.
15
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk has not substantially changed from the year ended
December 31, 2001.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following report of recent developments in previously reported legal
proceedings should be read in conjunction with Item 3, Legal Proceedings, in the
Company's annual report on Form 10-K for the fiscal year ended December 31, 2001
and Item 1, Legal Proceedings, in the Company's quarterly report on Form 10-Q
for the quarter ended March 31, 2002.
FLORIDA REGULATORY ACTION AND CLASS ACTION LITIGATION
In May 2001, the Florida Department of Insurance issued an administrative
complaint against UWLIC, a wholly owned subsidiary of the Company, challenging
UWLIC's rating and other practices in Florida relating to UWLIC's MedOneSM
products for individuals and their families. MedOneSM products sold by UWLIC in
Florida are written pursuant to a group master policy issued to an association
domiciled in a state other than Florida. The case was presented to an
Administrative Law Judge in a hearing held in January 2002.
In a recommended order entered April 25, 2002, the Administrative Law Judge held
that the evidence presented by the Florida Department of Insurance did not
support a conclusion that UWLIC had violated any provisions of the Florida
insurance statutes or regulations and recommended that all counts of the
Department's administrative complaint be dismissed. The recommended order was
sent to the Commissioner of the Florida Department of Insurance for entry of a
final order. On July 24, 2002, the Florida Department of Insurance issued a
final order affirming the recommendations from the Administrative Law Judge with
respect to six of eight counts. Among other things, the final order affirmed
that the policy issued to the association was exempt from most Florida rating
requirements. However, the Department reversed the Administrative Law Judge's
finding that tier rating does not violate state law applicable to policies
issued out of state, and ordered the suspension of UWLIC's license to sell new
business in Florida for one year. The Department's order specifically permits
UWLIC to continue to renew its existing business in Florida. On July 29, 2002,
the First District Court of Appeals for the State of Florida stayed the order of
the Florida Department of Insurance. The stay is effective until the Court of
Appeals rules on the Company's request to overturn the order. The Company
anticipates a reversal of the final order on appeal. In a press release issued
by the Company on July 29, 2002, announcing the stayed order, the Company also
stated that, beginning November 1, 2002, it will voluntarily implement a block
rating system for its MedOneSM business in Florida and discontinue its tier
rating system in that state.
In a separate proceeding involving substantially similar issues, a class action
lawsuit was filed against two of the Company's subsidiaries, American Medical
Security, Inc. and UWLIC in February 2000 in the Circuit Court for Palm Beach
County, Florida, by Evelyn Addison and others alleging that the Company failed
to follow Florida law in discontinuing writing certain health insurance policies
and offering new policies in 1998, and that the Company wrongfully terminated
coverage, improperly notified insureds of conversion rights and charged improper
premiums for new coverage. Plaintiffs also alleged that UWLIC's renewal rating
methodology violates Florida law. Plaintiffs are seeking damages unspecified in
the complaint. A bench trial on the liability issues of the case was held in
Circuit Court in March 2002.
In a final judgment entered April 24, 2002, the Circuit Court in the class
action lawsuit found among other things, that the policy issued by the Company
outside Florida was not exempt from any Florida rating laws and ordered that the
question of damages be tried before a jury. In light of the conflicting findings
of the Administrative Law Judge and the Circuit Court Judge, the Company
requested that the Court in the class action lawsuit reconsider its ruling. The
request was denied, as was the Company's request for appellate review. The
damages portion of the lawsuit is scheduled to be heard before a jury in
September 2002.
17
HEALTH ADMINISTRATORS LITIGATION
In February 2000, a $5.4 million verdict was entered against the Company's
subsidiaries AMS and UWLIC in the Common Pleas Court of Delaware County, Ohio,
Civil Division, in a lawsuit brought against AMS and UWLIC in 1996 by Health
Administrators of America, Inc. ("Health Administrators"), an insurance agency
owned and operated by a former agent of AMS. The lawsuit alleges breach of
written and oral contracts involving commission amounts and fraud. The case was
heard and decided by a magistrate who awarded damages to Health Administrators,
based on breach of written commission and agent contracts and ruled in favor of
the Company on breach of oral contracts and fraud. On March 29, 2001, the Court
of Appeals, Delaware County, Ohio, Fifth Appellate District affirmed a portion
of the verdict, with modifications, representing approximately $3.0 million in
damages, and reversed and remanded the remaining issues in the case representing
approximately $2.4 million in damages. The Company appealed the $3.0 million
portion of the damages to the Ohio Supreme Court, which, in July 2001, declined
to take the appeal. The Company paid substantially all of the approximately $3.0
million judgment in December 2001. On June 20, 2002, the magistrate ruled in
favor of the Company on the remanded portion of the case. The parties are
seeking clarification from the court on the calculation of interest applicable
to the judgment.
The Company is involved in the foregoing and various other legal and regulatory
actions occurring in the normal course of business. These actions include
threatened and actual challenges to the Company's tier rating methodology. Based
on current information including consultation with outside counsel, management
believes any ultimate liability that may arise from the above-mentioned and all
other legal and regulatory actions would not materially affect the Company's
consolidated financial position or results of operations. However, management's
evaluation of the likely impact of these actions could change in the future and
an unfavorable outcome could have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flow of a future
period.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on June 18, 2002 for
the purpose of electing four directors for terms expiring at the 2005 annual
meeting of shareholders. All four of the Company's nominees were elected. The
voting results for the election were as follows:
ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2005:
Roger H. Ballou:
For 11,825,552 shares
Withheld 36,335 shares
Abstained 0
Broker Non-Votes 0
W. Francis Brennan:
For 11,826,053 shares
Withheld 35,834 shares
Abstained 0
Broker Non-Votes 0
Edward L. Meyer, Jr.:
For 11,825,464 shares
Withheld 36,423 shares
Abstained 0
Broker Non-Votes 0
18
J. Gus Swoboda:
For 11,825,808 shares
Withheld 36,079 shares
Abstained 0
Broker Non-Votes 0
Further information concerning these matters, including the names of the
directors whose terms continued after the meeting, is contained in the Company's
Proxy Statement dated April 26, 2002 with respect to the 2002 Annual Meeting of
Shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS
See the Exhibit Index following the Signature page of this report, which is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed or submitted during the second
quarter of 2002:
o A Form 8-K dated April 24, 2002, was filed by the Company on April 26,
2002 to report recent developments in two previously reported legal
proceedings.
o A Form 8-K dated June 4, 2002, was filed by the Company on June 19,
2002 to report on matters related to the completion of the secondary
offering for the sale of approximately 3.0 million shares of the
Company's common stock by Blue Cross & Blue Shield United of Wisconsin.
o A Form 8-K dated June 27, 2002, was filed by the Company on June 27,
2002 to update the description of the Company's common stock and
associated preferred share purchase rights.
After the end of the quarter, a Form 8-K dated July 24, 2002, was filed by the
Company on July 31, 2002 to report recent developments in certain previously
reported legal proceedings.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: August 13, 2002
AMERICAN MEDICAL SECURITY GROUP, INC.
/S/ GARY D. GUENGERICH
--------------------------------------
Gary D. Guengerich
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer and Chief Accounting Officer
and duly authorized to sign on behalf
of the Registrant)
20
AMERICAN MEDICAL SECURITY GROUP, INC.
(the "Registrant")
(Commission File No. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended June 30, 2002
Exhibit DESCRIPTION Incorporated Herein Filed
NUMBER BY REFERENCE TO HEREWITH
4.1 Sixth Amendment dated as of August 1, X
2002 to Credit Agreement dated as of
March 24, 2000 among the registrant,
LaSalle Bank National Association and
other Lenders
4.2(a) Rights Agreement, dated as of Exhibit 1 to the Registrant's
August 9, 2001, between the Registration Statement on Form 8-A
Registrant and Firstar Bank, N.A., as filed August 14, 2001 and Exhibit 4 to
Rights Agent (the "Rights the Registrant's Current Report on
Agreement"), including the form of Form 8-K dated August 9, 2001, and
Rights Certificate attached as filed on August 14, 2001
Exhibit B thereto
4.2(b) Appointment and Assumption Agreement Exhibit 4.2 to the Registrant's Form
dated December 17, 2001, between the 8-K dated February 1, 2002 (the
Registrant and Firstar Bank, N.A., "2/1/02 8-K")
appointing LaSalle Bank, N.A. as
Rights Agent for the Rights Agreement
4.2(c) Amendment to the Rights Agreement Exhibit 4.1 to the 2/1/02 8-K
dated as of February 1, 2002
4.2(d) Amendment to Rights Agreement dated Exhibit 4.4(d) to the Registrant's
as of June 4, 2002 Form 8-K dated June 4, 2002, and filed
on June 19, 2002 (the "6/4/02 8-K")
10.1 Underwriting Agreement, dated May 29, Exhibit 10.4 to the 6/4/02 8-K
2002, among the Registrant, Blue
Cross & Blue Shield United of
Wisconsin and the Underwriters named
on Schedule I thereto
99.1 Certification Pursuant to 18 U.S.C. X
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
EX-1
Exhibit Incorporated Herein Filed
NUMBER DESCRIPTION BY REFERENCE TO HEREWITH
99.2 Certification Pursuant to 18 U.S.C. X
Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
EX-2