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, 2001
OR
[ ] Transition Report Pursuant To Section 13 Or 15(d) of The Securities Exchange
Act Of 1934
For the transition period from ______________ to ________________
COMMISSION FILE NUMBER 1-13154
AMERICAN MEDICAL SECURITY GROUP, INC.
(Exact name of Registrant as specified in its charter)
WISCONSIN 39-1431799
(State of Incorporation) (I.R.S. Employer Identification No.)
3100 AMS BOULEVARD
GREEN BAY, WISCONSIN 54313
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (920) 661-1111
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value, outstanding as of July 31, 2001: 14,009,083 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2001 and December 31, 2000......................3
Condensed Consolidated Statements of Operations
Three months ended June 30, 2001 and 2000; Six months
ended June 30, 2001 and 2000.............................5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000..................6
Notes to Condensed Consolidated Financial Statements
June 30, 2001............................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................17
Item 4. Submission of Matters to Vote of Security Holders...........17
Item 6. Exhibits and Reports on Form 8-K............................18
Signatures...............................................................19
Exhibit Index..........................................................EX-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
---------------------------------
(IN THOUSANDS)
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities $ 260,159 $ 262,428
Equity securities-preferred 2,450 2,368
Fixed maturity securities held to maturity, at amortized cost 4,303 4,320
Trading securities, at fair value 332 260
---------------------------------
Total investments 267,244 269,376
Cash and cash equivalents 12,123 15,606
Other assets:
Property and equipment, net 33,576 32,451
Goodwill and other intangibles, net 105,748 107,562
Other assets 42,319 46,928
---------------------------------
Total other assets 181,643 186,941
---------------------------------
Total assets $ 461,010 $ 471,923
=================================
See Notes to Condensed Consolidated Financial Statements
3
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2001 2000
---------------------------------
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 131,851 $ 145,310
Advance premiums 16,140 17,568
Payables and accrued expenses 33,047 25,902
Notes payable 40,658 41,258
Other liabilities 20,470 20,708
---------------------------------
Total liabilities 242,166 250,746
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 13,995,783 outstanding at June 30, 2001,
16,654,315 issued and 14,270,945 outstanding at December 31, 2000) 16,654 16,654
Paid-in capital 187,956 187,956
Retained earnings 32,621 36,295
Accumulated other comprehensive loss (net of tax benefit of $517,000
at June 30, 2001 and $2,126,000 at December 31, 2000) (960) (3,948)
Treasury stock (2,658,532 shares at June 30, 2001
and 2,383,370 shares at December 31, 2000, at cost) (17,427) (15,780)
---------------------------------
Total shareholders' equity 218,844 221,177
---------------------------------
Total liabilities and shareholders' equity $ 461,010 $ 471,923
=================================
See Notes to Condensed Consolidated Financial Statements
4
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2001 2000 2001 2000
--------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Insurance premiums $ 213,645 $ 240,537 $ 436,115 $ 488,442
Net investment income 4,405 4,886 8,919 9,769
Realized investment losses (152) (112) (179) (112)
Other revenue 5,408 5,015 10,709 9,904
--------------------------------- --------------------------------
Total revenues 223,306 250,326 455,564 508,003
Expenses:
Medical and other benefits 156,174 182,012 322,754 370,075
Selling, general and administrative 62,873 62,684 134,284 127,622
Interest expense 744 883 1,620 1,779
Amortization of goodwill and intangibles 907 947 1,814 1,893
--------------------------------- --------------------------------
Total expenses 220,698 246,526 460,472 501,369
--------------------------------- --------------------------------
Income (loss) before income taxes 2,608 3,800 (4,908) 6,634
Income tax expense (benefit) 1,142 1,540 (1,234) 2,715
--------------------------------- --------------------------------
Net income (loss) $ 1,466 $ 2,260 $ (3,674) $ 3,919
================================= ================================
Net income (loss) per common share:
Basic $ 0.10 $ 0.15 $ (0.26) $ 0.26
Diluted $ 0.10 $ 0.15 $ (0.26) $ 0.26
See Notes to Consolidated Financial Statements
5
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------------
2001 2000
---------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income (loss) $ (3,674) $ 3,919
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 5,071 4,879
Net realized investment gains 179 112
Increase in trading securities (72) (49)
Deferred income tax expense (benefit) (1,891) 3,442
Changes in operating accounts:
Other assets 4,891 14,928
Medical and other benefits payable (13,459) (28,944)
Advance premiums (1,428) 4,172
Payables and accrued expenses 7,145 (1,463)
Other liabilities (238) (8,649)
---------------------------------
Net cash used in operating activities (3,476) (7,653)
INVESTING ACTIVITIES:
Purchases of available for sale securities (66,407) (13,838)
Proceeds from sale of available for sale securities 67,593 9,487
Proceeds from maturity of available for sale securities 4,750 720
Proceeds from maturity of held to maturity securities - 630
Purchases of property and equipment (3,697) (2,912)
Proceeds from sale of property and equipment - 10
---------------------------------
Net cash provided by (used in) investing activities 2,239 (5,903)
FINANCING ACTIVITIES:
Issuance of common stock - 4
Purchase of treasury stock (1,646) (6,580)
Borrowings under line of credit agreement - 35,158
Repayment on line of credit agreement - (35,158)
Repayment of notes payable (600) (665)
---------------------------------
Net cash used in financing activities (2,246) (7,241)
---------------------------------
Cash and cash equivalents:
Net decrease (3,483) (20,797)
Balance at beginning of year 15,606 17,266
---------------------------------
Balance at end of period $ 12,123 $ (3,531)
=================================
See Notes to Condensed Consolidated Financial Statements
6
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2001
NOTE A. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States ("GAAP") for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the American Medical Security Group, Inc. ("AMSG"
or the "Company") annual report on Form 10-K for the year ended December 31,
2000.
NOTE B. EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share are computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per common share are computed by dividing net income (loss) by
the weighted average number of common shares outstanding, adjusted for the
effect of dilutive employee stock options.
The following table provides a reconciliation of the number of weighted
average basic and diluted shares outstanding:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
Weighted average common
shares outstanding - basic 14,041,590 15,100,507 14,125,650 15,302,693
Effect of dilutive stock options 52,485 55,635 - 61,872
-------------------------------- --------------------------------
Weighted average common
shares outstanding - diluted 14,094,075 15,156,142 14,125,650 15,364,565
================================ ================================
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 net loss 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
NOTE C. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income (loss) plus or minus
other comprehensive income (loss), which for the Company, under existing
accounting standards, includes unrealized gains and losses, net of income tax
effects, on certain investments in debt and equity securities. Comprehensive
income (loss) for the Company is calculated as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
Net income (loss) $ 1,466 $ 2,260 $ (3,674) $ 3,920
Unrealized gain (loss) on
available for sale securities (404) (200) 2,988 118
-------------------------------- --------------------------------
Comprehensive income (loss) $ 1,062 $ 2,060 $ (686) $ 4,038
================================ ================================
NOTE D. CREDIT AGREEMENT
At June 30, 2001, the Company maintained a revolving bank line of credit
agreement ("Credit Agreement") with a maximum commitment of $35.2 million and a
$10.0 million sublimit for swingline loans. At June 30, 2001, the outstanding
balance of advances under the Credit Agreement was $35.2 million. The Credit
Agreement contains customary covenants which, among other matters, require the
Company to achieve minimum financial results and restrict the Company's ability
to incur additional debt, pay future cash dividends and dispose of assets
outside the ordinary course of business. The Credit Agreement was amended in
April 2001 to revise the Company's applicable interest rate on outstanding loans
and the schedule of mandatory future commitment reductions including a $4.8
million maximum commitment reduction from $40.0 million to $35.2 million on
April 27, 2001. Revised future annual principal amounts due for all of the
Company's debt as of June 30, 2001 are $0.6 million for 2001, $6.2 million for
2002, $11.2 million for 2003, $12.5 million for 2004, and $10.2 million for
2005.
NOTE E. CONTINGENCIES
On August 26, 1999, a $6.9 million verdict was entered against the Company
in a lawsuit filed by Skilstaf, Inc. which principally alleged breach of
contract involving the timing of claims payments. Following an adverse decision
from the appeals court on March 12, 2001, the Company recognized an additional
accrual during the first quarter of 2001 representing the full potential loss
including punitive damages and other expenses. The Company has petitioned the
United States Supreme Court to review the case. In July 2001, at the direction
of the district court, the Company paid the full amount of the verdict plus
interest, even though final resolution of the case by the United States Supreme
Court is pending. The plaintiff has posted a letter of credit to secure
repayment of the verdict in the event of a decision favorable to the Company.
On February 7, 2000, a $5.4 million verdict was entered against the Company
in a lawsuit filed by Health Administrators, Inc., an insurance agency owned and
operated by a former agent of the Company, which alleged breach of contract
involving commission amounts due to such agent. On March 29, 2001, the Ohio
Court of Appeals affirmed a portion of the verdict, with modification,
representing approximately $3.0 million in damages, and reversed and remanded
the remaining issue in the case representing approximately $2.4 million in
damages. The Company appealed the $3.0 million portion of the damages to the
Ohio Supreme Court, which declined to take the appeal. The remanded portion of
the case is awaiting further action by the trial court. Management believes that
the Company has adequately provided for losses which may result from this case.
8
The Company is involved in various other legal and regulatory matters
occurring in the normal course of its business. The Company's financial results
for the six months ended June 30, 2001 reflect a first quarter pre-tax charge of
$9.0 million ($5.9 million after-tax) to cover estimated potential losses and
related expenses for legal related matters. In the opinion of management,
adequate provision has been made for losses which may result from legal and
regulatory actions; accordingly, the outcome of these matters is not expected to
have a material adverse effect on the consolidated financial statements.
NOTE F. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives. Based on the
Company's current accounting policy of measuring goodwill impairment based on
undiscounted cash flows, there is no goodwill impairment indicated.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of approximately $2.4 million ($0.17 per share) per year. The
Company will perform the first of the required impairment tests of goodwill and
intangible assets deemed to have indefinite lives as of January 1, 2002 by
comparing the fair value of the Company's reporting units to their carrying
amounts (book value), including goodwill. In determining the fair value of the
Company's reporting units, management will consider valuation techniques such as
the quoted market price of the Company's stock, the present value of future cash
flows and market comparison of similar assets and liabilities. As of June 30,
2001, the Company's book value per share was significantly higher than the
quoted market value of a share of stock. The Company has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company. If it is determined that an impairment exists as of January 1, 2002,
the charge recognized would be reported as the cumulative effect of a change in
accounting principle in the Company's GAAP basis consolidated financial
statements and would have no impact on cash flows or the statutory basis capital
and surplus of the Company's insurance subsidiaries.
NOTE G. SEGMENT INFORMATION
The Company has two reportable segments: 1) health insurance products, and
2) life insurance products. The Company's health insurance products consist of
the following coverages related to small group preferred provider organization
products: MedOne (for individuals and families) and small group medical, self
funded medical, dental and short-term disability. Life products consist
primarily of group term-life insurance. The "All Other" segment includes
operations not directly related to the business segments and unallocated
corporate items (i.e., corporate investment income, interest expense on
corporate debt, amortization of goodwill and intangibles and unallocated
overhead expenses). The 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 profit or loss before
income taxes, not including gains and losses on the Company's investment
portfolio. The accounting policies of the reportable segments are the same as
those used to report the Company's consolidated financial statements.
Intercompany transactions have been eliminated prior to reporting reportable
segment information.
A reconciliation of segment income (loss) before income taxes to
consolidated income (loss) before income taxes is as follows:
9
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
Health segment $ 1,321 $ 548 $ (7,185) $ 1,264
Life segment 1,598 2,790 3,348 5,030
All other (311) 462 (1,071) 340
-------------------------------- --------------------------------
Income (loss) before income taxes $ 2,608 $ 3,800 $ (4,908) $ 6,634
================================ ================================
Operating results and statistics for each of the Company's segments are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
HEALTH SEGMENT
OPERATING RESULTS
Revenues:
Insurance premium $ 209,124 $ 228,437 $ 426,098 $ 461,391
Net investment income 2,265 2,353 4,715 4,898
Other revenue 4,357 4,020 8,587 7,983
-------------------------------- --------------------------------
Total revenues 215,746 234,810 439,400 474,272
Expenses:
Medical and other benefits 154,981 175,569 319,178 354,074
Selling, general and administrative 59,444 58,693 127,407 118,934
-------------------------------- --------------------------------
Total expenses 214,425 234,262 446,585 473,008
-------------------------------- --------------------------------
Income (loss) before income taxes $ 1,321 $ 548 $ (7,185) $ 1,264
================================ ================================
FINANCIAL STATISTICS
Loss ratio 74.1% 76.9% 74.9% 76.7%
Expense ratio 26.3% 23.9% 27.9% 24.0%
-------------------------------- --------------------------------
Combined ratio 100.4% 100.8% 102.8% 100.7%
================================ ================================
Membership at End of Period:
Health:
Fully insured medical 394,387 498,415
Self funded medical 45,462 50,680
Stand-alone dental 186,990 179,760
--------------------------------
Total health 626,839 728,855
(a) Total health membership for the Company of 626,867 and 740,335 at June 30,
2001 and 2000 includes HMO membership of 28 and 11,480, respectively. HMO
operations are not included in health segment operating results.
10
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------------------------- --------------------------------
(IN THOUSANDS)
LIFE SEGMENT
OPERATING RESULTS
REVENUES:
Insurance premiums $ 4,483 $ 5,774 $ 9,446 $ 11,846
Net investment income 162 157 336 316
Other revenue 40 58 82 114
-------------------------------- --------------------------------
Total revenues 4,685 5,989 9,864 12,276
Expenses:
Medical and other benefits 1,690 1,547 3,682 3,837
Selling, general and administrative 1,397 1,652 2,834 3,409
-------------------------------- --------------------------------
Total expenses 3,087 3,199 6,516 7,246
-------------------------------- --------------------------------
Income before income taxes $ 1,598 $ 2,790 $ 3,348 $ 5,030
================================ ================================
FINANCIAL STATISTICS
Loss ratio 37.7% 26.8% 39.0% 32.4%
Expense ratio 30.3% 27.6% 29.1% 27.8%
-------------------------------- --------------------------------
Combined ratio 68.0% 54.4% 68.1% 60.2%
================================ ================================
Membership at End of Period 211,547 270,600
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
American Medical Security Group, Inc., together with its subsidiary
companies ("AMSG" or the "Company"), is a provider of health care benefits and
insurance products for individuals and small employer groups. The Company's
principal product offerings are (1) health insurance for small employer groups
and (2) health insurance for individuals and families ("MedOne"). The Company
also offers life, dental, prescription drug, disability and accidental death
insurance, and provides stop-loss reinsurance and benefit administration for
self funded employer groups. The Company's products are actively marketed in 32
states and the District of Columbia through independent agents. The Company's
products generally provide discounts to insureds that utilize preferred provider
organizations ("PPOs"). AMSG owns a preferred provider network and also
contracts with other networks to ensure cost-effective health care choices to
its customers.
RESULTS OF OPERATIONS
The Company reported net income of $1.5 million or $0.10 per share for the
second quarter of 2001. This compares to net income of $2.3 million or $0.15 per
share for the second quarter of 2000. The decrease in income from the second
quarter of the prior year primarily reflects (1) a higher selling, general and
administrative expense ratio from higher agent commissions and issue costs
resulting from the company's change in product mix, (2) lower premium revenues,
and (3) lower investment income. Partially offsetting these factors was an
improvement in the health loss ratio.
For the six months ended June 30, 2001, the Company reported a net loss of
$3.7 million or $0.26 per share, compared to net income of $3.9 million or $0.26
per share for the same period in 2000. The six month results for 2001 reflect an
after-tax charge of $5.9 million or $0.41 per share taken in the first quarter
for legal related matters. See "Part II., Item 1. Legal Proceedings" for a
detailed discussion.
Excluding the effect of the legal accrual recorded in the first quarter,
the results for the second quarter of 2001 represent the third consecutive
quarter of improved earnings for the Company. The Company's recent improvement
in performance results from its pricing actions as well as early benefits from
implementation of management's strategic plan. The Company's health loss ratio
has declined for the third consecutive quarter and is at its lowest point in
more than two years. Management anticipates that the trend of health loss ratio
and earnings improvement will continue during the remainder of 2001. Management
now anticipates earnings to be between $0.42 and $0.52 per share for the full
year of 2001, excluding the first quarter legal accrual.
INSURANCE PREMIUMS AND MEMBERSHIP
Insurance premiums for the three months ended June 30, 2001 decreased 11.2%
to $213.6 million from $240.5 million for the same period in 2000. For the six
month period ended June 30, 2001, insurance premiums decreased to $436.1 million
from $488.4 million for the same period in the prior year. The decrease
primarily resulted from a decline in membership in select unprofitable small
group and exited markets, partially offset by rising premium rates on the
continuing block of business. Average fully insured medical premium per member
per month for the second quarter of 2001 increased by 14.2% to $153, compared to
the second quarter of 2000, reflecting significant rate actions taken by the
Company. Insurance premiums for the Company's MedOne product increased 27.1%
from the second quarter of the prior year. Management considers the MedOne
product to be a key strategic product and continues to take steps to accelerate
membership and premium growth in this market through an expanded agent force and
additional regional and national distribution agreements.
Total medical and dental membership declined from 740,335 members at June
30, 2000 to 626,867 members at June 30, 2001. The membership decrease is a
result of the Company's success in terminating business in several unprofitable
markets, including exited markets, and lower sales due to aggressive premium
12
rate increases. Based on the most recent sales projections and the rate of
membership terminations, management anticipates 2001 insurance premiums will be
down approximately 10% from 2000 and membership will be down approximately 15%
before beginning to improve early in 2002. The expected improvement in insurance
premiums and membership in 2002 should result from management's efforts to add
distribution outlets and the introduction of promising new products.
NET INVESTMENT INCOME
Net investment income includes investment income and realized gains and
losses on investments. Investment gains and losses are realized in the normal
investment process in response to market opportunities. Net investment income
for the three months ended June 30, 2001 decreased to $4.3 million from $4.8
million for the three months ended June 30, 2000. Net investment income was $8.7
million for the six months ended June 30, 2001 compared to $9.7 for the same
period in 2000. The decrease in net investment income is due primarily to a
decrease in average invested assets. Average invested assets at cost were $268.8
million for the second quarter of 2001. In comparison, average invested assets
were $298.6 million for the second quarter of 2000. The average annual
investment yield was 6.6% for both periods. Invested assets have declined
primarily as a result of the repurchase of company stock and negative operating
cash flows.
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income from
claims processing and other administrative services, increased to $5.4 million
for the quarter compared to $5.0 million for the second quarter of 2000, and to
$10.7 million for the six months ended June 30, 2001 from $9.9 million for the
same period in 2000. The increase from the prior year is primarily due to an
increase in fees charged for administrative services.
LOSS RATIO
The health loss ratio for the second quarter of 2001 was 74.1% compared to
76.9% for the second quarter of 2000. The health loss ratio for the six months
ended June 30, 2001 was 74.9% compared to 76.7% for the six months ended June
30, 2000. The significant improvement was due to management's actions and
strategies to increase premiums and combat medical inflation. These actions
included premium rate increases, claims cost control initiatives and the exit
from unprofitable small group markets. The reduction also reflects increased
sales of MedOne products, which are priced for a lower loss ratio but have
higher selling and administrative costs. As anticipated, claim costs per member
per month have increased slightly, but were more than offset by increased
premiums per member per month. Management believes its pricing strategies will
maintain premium increases ahead of expected claim costs, which should further
improve the loss ratio during 2001.
The life segment loss ratio for the three months ended June 30, 2001 was
37.7% compared to 26.8% for the three months ended June 30, 2000. The life
segment loss ratio for the current reporting period is consistent with the
Company's average historical trend and anticipated future experience for this
segment. The life segment loss ratio reported for the second quarter of the
prior year was unusually low due to an unexpected decrease in actual life claims
experience for that period. The life segment loss ratio for the six months ended
June 30, 2001 was 39.0% compared with 32.4% for the six months ended June 30,
2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE RATIO
The selling, general and administrative ("SG&A") expense ratio includes
commissions and selling expenses, administrative expenses, and premium taxes and
assessments. The SG&A expense ratio for health segment products for the three
months ended June 30, 2001 was 26.3%. This compares to 23.9% reported for the
three months ended June 30, 2000. Excluding the non-recurring legal accrual
recorded during the first quarter of 2001, the SG&A expense ratio for health
segment products for the six months ended June 30, 2001 was 25.8%
13
compared with 24.0% for the same period in 2000. The increase is due to higher
agent commissions and issue costs resulting from the Company's change in product
mix and the effects of lower premium volume.
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 used in operations was $3.5 million for the six months
ended June 30, 2001. This compares to cash used in operations of $7.7 million
for the six months ended June 30, 2000. The improvement in cash flow primarily
reflects a leveling of claim inventories and a slow-down in terminated business.
Management expects cash flow to be negative for the full year of 2001 due to the
payment of litigation matters during the third quarter.
The Company's investment portfolio consists primarily of investment grade
bonds and has limited exposure to equity securities. At June 30, 2001, $264.5
million or 99.0% of the Company's investment portfolio was invested in bonds. At
December 31, 2000, $267.0 million or 99.0% of the Company's investment portfolio
was invested in bonds. The bond portfolio had an average quality rating of Aa3
at June 30, 2001 and December 31, 2000, as measured by Moody's Investor Service.
The majority of the bond portfolio was classified as available for sale. The
Company has no investment in mortgage loans, non-publicly traded securities
(except for principal only strips of U.S. Government securities), real estate
held for investment or financial derivatives.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict dividends to their
parent companies. Based upon the financial statements of the Company's insurance
subsidiaries as of December 31, 2000, as filed with the insurance regulators, no
dividends may be paid by these subsidiaries without prior regulatory approval.
The National Association of Insurance Commissioners has adopted risk-based
capital ("RBC") standards for health and life insurers designed to evaluate the
adequacy of statutory capital and surplus in relation to various business risks
faced by such insurers. The RBC formula is used by state insurance regulators as
an early warning tool to identify insurance companies that potentially are
inadequately capitalized. At December 31, 2000, the Company's principal
insurance company subsidiaries had RBC ratios that were substantially above the
levels which would require regulatory action.
During 2000, the Company's Board of Directors authorized an increase to the
Company's share repurchase program to a maximum allowable repurchase of $18.0
million. The Company purchased 88,900 shares of its outstanding common stock
during the second quarter of 2001, bringing the total purchased to 2.7 million
shares at an aggregate purchase price of $17.4 million.
In determining when and whether to purchase future shares under the stock
repurchase program, management considers market price, the number of shares
actively traded in the market, indications of seller interest, the number of
shares held by large shareholders, the effect of purchases on shareholder value
and other relevant factors. Because of the unpredictability of these factors, no
assurance can be given as to how many, if any, shares may be repurchased in the
future.
At June 30, 2001, the Company maintained a revolving bank line of credit
agreement ("Credit Agreement") with a maximum commitment of $35.2 million and a
$10.0 million sublimit for swingline loans. At June 30, 2001, the outstanding
balance of advances under the Credit Agreement was $35.2 million. The Credit
Agreement contains customary covenants which, among other matters, require the
Company to achieve minimum financial results and restrict the Company's ability
to incur additional debt, pay future cash dividends and dispose
14
of assets outside the ordinary course of business. The Credit Agreement was
amended in April 2001 to revise the Company's applicable interest rate on
outstanding loans and the schedule of mandatory future commitment reductions
including a $4.8 million maximum commitment reduction from $40.0 million to
$35.2 million on April 27, 2001. Revised future annual principal amounts due for
all of the Company's debt as of June 30, 2001 are $0.6 million for 2001, $6.2
million for 2002, $11.2 million for 2003, $12.5 million for 2004, and $10.2
million for 2005.
CAUTIONARY FACTORS
This report and other documents or oral presentations prepared or delivered
by and on behalf of the Company contain or may contain "forward-looking
statements" within the meaning of the safe harbor provisions of the United
States Private Securities Litigation Reform Act of 1995. Forward-looking
statements are statements based upon management's expectations at the time such
statements are made and are subject to risks and uncertainties that could cause
the Company's actual results to differ materially from those contemplated in the
statements. Readers are cautioned not to place undue reliance on the
forward-looking statements. When used in written documents or oral
presentations, the terms "anticipate," "believe," "estimate," "expect,"
"objective," "plan," "possible," "potential," "project" and similar expressions
are intended to identify forward-looking statements. In addition to the
assumptions and other factors referred to specifically in connection with such
statements, factors that could cause the Company's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
-- Unexpected increases in health care costs resulting from the aging of the
population, advances in medical technology, increased utilization of
medical services and prescription drugs, health care inflation
(particularly technology-driven procedures and drug costs), possible
epidemics and natural disasters and other factors affecting the delivery
and cost of health care that are beyond the Company's control.
-- The Company's ability to profitably distribute and sell its products,
including, changes in its business relationships with independent agents
who sell the Company's products, the Company's ability to retain key
producing sales agents, the Company's ability to expand its distribution
network, competitive factors such as the entrance of additional competitors
into the Company's markets, competitive pricing practices, the Company's
ability to generate new sales, sell new products and retain existing
customers, the Company's ability to predict future health care cost trends
and adequately price its products, and the Company's ability to control
expenses during a time of declining revenue and membership.
-- Federal and state health care reform laws adopted in recent years,
currently proposed (such as the "Patients' Bill of Rights") or that may be
proposed in the future, which affect or may affect the Company's
operations, products, profitability or business prospects. Reform laws
adopted in recent years generally limit the ability of insurers and health
plans to use risk selection as a method of controlling costs for small
group business.
-- Regulatory factors, including delays in regulatory approvals of rate
increases and policy forms; regulatory action resulting from market conduct
activity and general administrative compliance with state and federal laws;
restrictions on the ability of the Company's subsidiaries to transfer funds
to the Company or its other subsidiaries in the form of cash dividends,
loans or advances without prior approval or notification; the granting and
revoking of licenses to transact business; the amount and type of
investments that the Company may hold; minimum reserve and surplus
requirements; and risk-based capital requirements.
-- Factors related to the Company's efforts to deal with adverse medical loss
ratio in its small group health business (which include implementing
significant rate increases, terminating business in unprofitable markets,
and introducing redesigned products), including the willingness of
employers and individuals to accept rate increases, premium repricing and
redesigned products.
-- The development of and changes in claims reserves, particularly for highly
regulated markets and exited markets where insureds may be inclined to
increase utilization prior to termination of their policies.
15
-- The effectiveness of the Company's strategy to expand sales of its MedOne
products for individuals and families, to focus its small group health
product sales in core markets and to grow its ancillary products, including
its life, dental and self-funded benefit administration business.
-- The cost and other effects of legal and administrative proceedings,
including the expense of investigating, litigating and settling any claims
against the Company, and the general increase in litigation involving
managed care and medical insurers.
-- Adverse outcomes of litigation against the Company.
-- Restrictions imposed by financing arrangements that limit the Company's
ability to incur additional debt, pay future cash dividends and transfer
assets.
-- Changes in rating agency policies and practices and the ability of the
Company's insurance subsidiaries to maintain or exceed their A- (Excellent)
rating by A.M. Best.
-- General economic conditions, including changes in interest rates and
inflation that may impact the performance on the Company's investment
portfolio or decisions of individuals and employers to purchase the
Company's products.
-- The Company's ability to maintain attractive preferred provider networks
for its insureds.
-- The Company's ability to integrate effectively the operational, managerial
and financial aspects of future acquisitions.
-- Factors affecting the Company's ability to hire and retain key executive,
managerial, professional and technical employees.
-- Other business or investment considerations that may be disclosed from time
to time in the Company's Securities & Exchange Commission filings or in
other publicly disseminated written documents.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year ended
December 31, 2000.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 26, 1999, a $6.9 million verdict was entered against American
Medical Security, Inc. ("AMS Inc."), the Company's third party administrator
("TPA") subsidiary, in the United States District Court for the Middle District
of Alabama. The decision was made in a lawsuit brought against AMS Inc. by
Skilstaf, Inc. ("Skilstaf"), an Alabama employee leasing company, in January
1998 alleging that AMS Inc. delayed claims payments under a contract with
Skilstaf. Skilstaf sought unspecified damages. The contract, which was entered
into in 1992 and terminated by Skilstaf in 1996, was a TPA contract for
Skilstaf's self funded employee benefit plan. AMS Inc. has argued that this case
is governed by the Employee Retirement Income Security Act of 1974, as amended,
which preempts all state law causes of action and limits damages to contract
damages. AMS Inc.'s post-trial motion to set aside the jury's finding was denied
by the court on March 20, 2000. As a result, AMS Inc. filed a notice of appeal
with the Eleventh Circuit Federal Appeals Court on April 17, 2000. On March 12,
2001, the Company received the Court of Appeal's decision, rendered on March 9,
2001, affirming the decision of the District Court. On March 30, 2001, AMS Inc.
filed a petition with the Court of Appeals for a rehearing by the full Court of
Appeals, which was denied on May 4, 2001. On August 1, 2001, the Company filed a
petition with the United States Supreme Court for a writ of certiorari to review
the decision of the Court of Appeals. In July 2001, at the direction of the
district court, the Company paid the full amount of the verdict plus interest,
even though final resolution of the case by the United States Supreme Court is
pending. The plaintiff has posted a letter of credit to secure repayment of the
verdict in the event of a decision favorable to the Company.
On February 7, 2000, a $5.4 million verdict was entered against AMS Inc.
and United Wisconsin Life Insurance Company ("UWLIC"), the Company's insurance
subsidiary, in the Common Pleas Court of Delaware County, Ohio, Civil Division,
in a lawsuit brought against AMS Inc. and UWLIC in 1996 by Health Administrators
of America, Inc. ("Health Administrators"), an insurance agency owned and
operated by a former agent of AMS Inc. The lawsuit alleges breach of written and
oral contracts involving commission amounts and fraud. The case was heard and
decided by a magistrate who awarded damages to Health Administrators, based on
breach of written commission and agent contracts and ruled in favor of AMS Inc.
and UWLIC on breach of oral contracts and fraud. On February 22, 2000, AMS Inc.
and UWLIC filed objections with the Common Pleas Court requesting that the
magistrate's decision against AMS Inc. and UWLIC be reversed. The Common Pleas
Court approved the magistrate's decision on April 10, 2000. As a result, AMS
Inc. and UWLIC filed a notice of appeal with the Court of Appeals, Delaware
County, Ohio, Fifth Appellate District on April 18, 2000. On March 29, 2001, the
Court of Appeals affirmed a portion of the verdict, with modifications,
representing approximately $3.0 million in damages, and reversed and remanded
the remaining issue in the case representing approximately $2.4 million in
damages. On May 2, 2001, the Company appealed the $3.0 million portion of the
damages to the Ohio Supreme Court, which, on July 25, 2001, declined to take the
appeal. The remanded portion of the case is awaiting further action by the trial
court. Management believes the Company has adequately provided for losses that
may result from this case.
The Company is involved in various legal and regulatory actions occurring
in the normal course of its business. In the opinion of management, adequate
provision has been made for losses which may result from litigation and other
legal and regulatory actions; accordingly, the outcome of these matters is not
expected to have a material adverse effect on its consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on May 15, 2001
for the purpose of electing four directors for terms expiring at the 2004 Annual
Meeting of Shareholders. All four of the Company's nominees were elected. The
voting results for the election were as follows:
17
ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2004:
Mark A. Brodhagen:
For 13,852,597 shares
Withheld 47,235 shares
Abstained 0
Broker Non-Votes 0
Eugene A. Menden:
For 13,850,784 shares
Withheld 49,048 shares
Abstained 0
Broker Non-Votes 0
Samuel V. Miller:
For 13,852,846 shares
Withheld 46,986 shares
Abstained 0
Broker Non-Votes 0
Michael T. Riordan:
For 13,853,102 shares
Withheld 46,730 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 March 30, 2001 with respect to the 2001 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
A Form 8-K dated May 18, 2001, was submitted by the Company to furnish
under Item 9, Regulation FD Disclosure, a financial presentation included on the
Company's website. The Company also filed a Form 8-K dated August 9, 2001, to
report the adoption of a shareholder rights plan.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: AUGUST 14, 2001
AMERICAN MEDICAL SECURITY GROUP, INC.
/S/ GARY D. GUENGERICH
Gary D. Guengerich
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer
and duly authorized to sign on behalf of the Registrant)
19
AMERICAN MEDICAL SECURITY GROUP, INC.
(COMMISSION FILE NO. 1-13154)
EXHIBIT INDEX
TO
FORM 10-Q QUARTERLY REPORT
for quarter ended June 30, 2001
INCORPORATED
HEREIN FILED
EXHIBIT NO. DESCRIPTION BY REFERENCE TO HEREWITH
3 Articles of Amendment to Restated X
Articles of Incorporation with Respect to
Designation, Preferences, Limitations and
Relative Rights of Series B Junior
Cumulative Preferred Stock
4 Rights Agreement, dated as of August 9, Exhibit 1 to the Registrant's
2001, between American Medical Registration Statement on Form 8-A
Security Group, Inc. and Firstar Bank, filed on August 14, 2001 and Exhibit 4
N.A., as Rights Agents, including the to the Registrant's Current Report on
form of Right Certificate as Exhibit B Form 8-K dated August 9, 2001, and
thereto. field on August 14, 2001.
EX-1