UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
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PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
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AMERICAN MEDICAL SECURITY GROUP, INC.
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Filed by: American Medical Security Group, Inc.
Pursuant to Rule 14a-6(b)
under the Securities Exchange Act of 1934
Subject Company: American Medical Security Group, Inc.
Commission File No. 1-13154
Samuel V. Miller, Chairman of the Board of Directors, President and Chief
Executive Officer and John R. Lombardi, Executive Vice President, Chief
Financial Officer and Treasurer of American Medical Security Group, Inc.
("AMS"), discussed AMS's financial results for the quarter ended September 30,
2004, in a public conference call at 9:00 a.m., Central Standard Time, on
Thursday, November 4, 2004, the content of which discussion was transcribed and
is hereby incorporated by reference into this filing.
AMS
AMS THIRD QUARTER 2004 FINANCIAL CONFERENCE CALL
NOVEMBER 4, 2004
9:00 AM CT
Conference Coordinator: Good day.
All set now on the lines in a listen only mode.
At this time I would like to turn the call over to Mr. Sam
Miller, Chairman, President, and CEO of American Medical
Security.
Please go ahead, sir.
Sam Miller: Good morning everyone. We're glad you could join us to
review our results for the third quarter of 2004. I'm
joined today by John Lombardi, our CFO, Tim Moore, our
General Counsel, Cliff Bowers, VP of Investor Relations.
Before we begin our comments I'll ask Tim Moore to present
our necessary cautionary statement. Tim.
Tim Moore: Thanks, Sam.
I'd like to remind everyone that some of the statements
made during this conference call may be forward-looking
statements. Forward-looking statements express the
company's expectations for the future rather than
historical facts. Such statements are subject to inherent
risks and uncertainties that may cause actual results or
events to differ materially from the
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company's expectations. Please refer to the cautionary
statements contained in yesterday's press release, our
Definitive Proxy Statement filed with the SEC on November
1, 2004, relating to the proposed merger, and the various
documents filed by the company with the SEC for discussion
of some of these risk factors affecting the company and
its business. Also please be aware that forward-looking
statements made today express the company's expectations
as of today, and that the company assumes no obligation to
update such statements as a result of new information,
changes in circumstances, future events, or for any other
reason. Finally, reference will be made this morning to
certain amounts or ratios that are non-GAAP financial
measures. Management believes that these non-GAAP measures
are useful in understanding the ongoing operations of the
company. Listeners are encouraged to refer to our press
release and the financial supplements found in the
Investor Section of our website for reconciliation of such
non-GAAP measures to the most directly comparable GAAP
amount. Additionally investors and security holders are
urged to read the Definitive Proxy Statement and any other
relevant documents filed with the SEC because they contain
important information about the proposed merger.
Sam.
Sam Miller: Thanks, Tim. I'm certainly aware that there's a great
deal of interest in the status of our proposed merger with
PacifiCare. And I'll comment on that later in the call.
First, let's look at our business performance for the
period.
For the third quarter we reported an adjusted net income
of 54 cents per diluted share and GAAP net income of 36
cents per diluted share.
John will provide details in a moment but suffice it to
say the trends impacting our business in recent quarters
remain largely unchanged.
On one hand our MedOne individual membership continues to
grow nicely. Our consumer driven product designs,
including those compatible with Health Savings Account,
have been well received by their agents and their
customers.
On the other hand, our small group business remains
constrained by the economy and, to some degree, the
competitive environment. The economic turnaround has not
yet stimulated small employers to increase their
workforces or to initiate or increase health benefit
coverage.
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While the environment in our two businesses are markedly
different, we believe we are taking the actions necessary
to maximize our prospects in both. I'll have more comments
on that in just a few moments.
Before I do, I'll ask John to take you through our
financial results for the third quarter and year-to-date.
John.
John Lombardi: Thank you, Sam. Good morning everyone.
As Sam just mentioned we're pleased to report third
quarter adjusted net income of $7.9 million or 54 cents
per share. That compares to an adjusted net income for the
third quarter of 2003 of $7 million or 49 cents per share.
Adjusted net income for the nine months in 2004 is $23.3
million or $1.59 per share compared to $20.1 million or
$1.44 per share in 2003. Net income improved 16%
year-over-year on an adjusted basis reflecting continued
improvements in operating performance. Both the loss and
expense ratios have improved year-over-year. I'll talk
more about our operating ratios a little later.
Before I go further, let me say, as noted in our press
release, we are using certain non-GAAP or adjusted amounts
in our discussion. Adjusted net income excludes
discontinued operations for 2003 and realized investment
gains and losses for both years. Also, for 2004 it
excludes a one-time gain in the first quarter from a
settlement with our former pharmacy benefits manager. In
addition, it excludes a charge for transaction costs in
the third quarter relating to the pending merger with
PacifiCare.
Now let's look at top line and membership results. Total
revenues were $183.4 million in the third quarter of 2004.
This is a sequential decline of .3 of 1% or $600,000.
Trends in medical membership have an impact - have a
significant impact on revenues. Let me discuss two of
these membership trends and how they affect revenue.
First, we continue to see a shift in the mix of our
business toward MedOne and away from Group. Our MedOne
products have a significantly lower premium than group
products. In the third quarter, MedOne premiums per member
averaged 32% less than the premium charged to the average
group member. Secondly, we continue to see a trend for
consumer-driven products, such as our HSA product, which
have scaled back benefits and lower premiums. This is
particularly true for MedOne products. In fact, we have
seen average per member per month premiums
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for MedOne products decrease at an annual rate of 9%
during the third quarter. While both these trends have a
neutral positive effect on our bottom line, they have put
pressure on top line growth.
Total health membership which includes both medical and
dental members was 530,000 members at the end of the third
quarter. This is a decrease of about 4,000 members from
the second quarter and is due to a reduction in dental
membership.
On the other hand, our medical membership increased by 300
members in the third quarter driven primarily by
increasing MedOne membership. As we note in our press
release, new member enrollment for our MedOne business has
continued its strong performance, leading to in force
membership growth for four consecutive quarters.
Increases in MedOne membership have largely been offset by
reductions in group membership. Group membership continues
to experience a difficult economic environment resulting
in net same-store membership reductions from our in-force
business. The trend in the first three quarters of 2004 is
slightly better than 2003. However, same-store membership
deletes continue to have a negative impact on group
membership.
Now let's spend a little time looking at our key operating
ratios. The third quarter 2004 health segment loss ratio
of 67.7% is an improvement of 50 basis points over the
third quarter of last year. On a year-to-date basis the
adjusted health segment loss ratio also improved 40 basis
points to 67.5% in 2004.
Recent experience indicates that claim cost trends have
remained fairly constant, but there are indicators that
they may be declining slightly.
The health segment expense ratio in the third quarter
increased 20 basis points to 27.2% compared to 27% in the
same period last year. For nine months, the expense ratio
improved 10 basis points from 27.6% in 2003 to 27.5% in
2004.
The health segment combined ratio, which is the sum of the
loss and expense ratios, improved 40 basis points in the
third quarter over the same period last year. For the
first nine months of 2004, the adjusted health segment
combined ratio improved 50 basis points over 2003. As I
mentioned earlier, this reflects the improvements in both
the loss and expense ratios.
Now let's take a look at our cash flow and balance sheet.
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Cash flow from operations during the third quarter of 2004
was $4.7 million compared to $9.1 million for the same
period one year ago. Cash flow in the third quarter of
2004 was significantly impacted by litigation related
payments in excess of $10 million as well as the payment
of certain merger related transaction costs.
Net cash provided by operations for the first nine months
of 2004 was $11.5 million compared from cash from
operations of $7.5 million in 2003.
Our balance sheet continues to be strong. Our debt to
total capital ratio is 11%, reflecting our strong capital
position.
Our days in claims payable decreased by approximately nine
days going from 92 days at the end of the second quarter
to 83.1 days at the end of the third quarter. This
decrease is due primarily to the payment of the litigation
settlements I just mentioned.
Finally book value per share is up 13% to $17.78 compared
to $15.71 one year ago.
Thank you. Now I'll turn the call back to Sam.
Sam Miller: Thanks, John.
We talked for several quarters about the continued
emergence of consumer-driven healthcare and the need to
get consumers engaged in the economics of their healthcare
decisions. Our agents now see consumer directed plans such
as HSAs, HRAs, and other high deductible plans as a
competitive imperative.
Agents are hungry not just for the plans but also for the
necessary expertise to properly market and administer
them. We're working diligently to fill that need and
become their carrier of choice for consumer-driven
products.
I believe AMS is well positioned to accomplish that. In
the past few years we've built a diverse portfolio of
consumer-directed products and marketing tools for both of
our core businesses. That includes a range of Health
Savings Accounts compatible products for individuals that
have been brought to market since the beginning of the
year.
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In the past few months we've also introduced HSA products
for small groups in a number of our states to complement
the Health Reimbursement Arrangement plans we unveiled
last year.
Beyond the consumer-driven opportunity, we are working to
augment our distribution systems by expanding both our
MedOne specialists and telesales operation. We believe our
investment in this area will allow us to further
accelerate our MedOne growth by multiplying our agent
contact.
At the same time we're beginning to roll out consumer
friendly telephonic and internet based enrollment tools.
These new processes protect the critical agent link while
having the potential to significantly reduce the time
agents need to directly spend on the enrollment process.
That frees them up to sell more business, hopefully ours.
One last subject, and that is our proposed merger with
PacifiCare. Most of you are already aware that our
definitive proxy statement and proxy card have been mailed
to our shareholders and that our shareholder meeting is
scheduled for December 2nd. It's anticipated that the
acquisition will be complemented or completed after
shareholder approval and state and federal regulatory and
other customary approvals are received.
As you might imagine, legal constraints of the merger
process have limited how aggressive we can be in
transition planning and implementation.
However, I have great confidence that this merger, once
final, will quickly begin to realize its full potential. I
look forward to being part of that success story.
With that, I'll ask the Operator to facilitate any
questions you might have.
Conference Coordinator: At this time, if you would like to ask a question, you
may do so by pressing star one on your touchtone phone.
You may withdraw your question at any time by pressing the
pound key. Again to ask to a question you may do so by
pressing star one on your touchtone phone. We'll wait one
moment while questions queue up.
Our first question comes from Jo France of Banc of
America.
Please go ahead.
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Jo France: Great. Thank you very much. I just have one quick
question.
PacifiCare, speaking recently, indicated that when you had
talked initially about the overlap between the two
companies enrollment being about 24%, which, if I'm doing
the math right, is somewhere between 75,000 and 80,000
lives. Howie suggested that you all are looking into the
possibility of immediately putting those lives into the
PacifiCare network with their discounts instead of yours.
How is that process proceeding, and what do you think the
odds are of it being effective prior to the January close?
Sam Miller: Well we've had some arms length discussions about
purchasing networks ahead of the close, and we're
proceeding with those discussions. Obviously getting the
synergies from their network discounts is a substantial
deal and we'll go at that process as quickly as we can to
start with on an arms length discussion basis and we hope
to hit the ground running kind of at the first of the
year, I think.
Jo France: Kind of a related question then is, also, have you - can
you actually switch your PBM in advance of the closing?
Sam Miller: Well we have a contract with our current PBM and we expect
to honor our agreement with our PBM.
Jo France: What is it run through?
Sam Miller: I can't answer that question. It's a five-year contract
and I think there's probably three years left, two or
three.
Jo France: That's great. Thank you very much.
Conference Coordinator: Our next question will come from the side of Sheryl
Skolnick of Folcrum Global Partners.
Please go ahead.
Sheryl Skolnick: Good morning everyone.
It's always a sigh of relief when I know I've dialed in on
the right phone number.
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The litigation settlements that you paid were - could you
tell us were they in relation - which suit they were in
relation to, the Alabama, Georgia or Florida?
Sam Miller: You know Sheryl, we never kind of delve into litigation
payments. They're always kind of confidential in nature
and so forth. So just - we settled some litigation that
we've disclosed before.
Sheryl Skolnick: I'm not sure why it matters that you can't tell us which
one it was on because - okay fine.
And then, can you tell us just where you are in terms of
having spent the $10 million as a percent of risk-based
capital and how much cash would be available to dividend
up to the parent?
Sam Miller: Well I think our risk-based capital calculation is about
808%, not scoring any basis points here, but about 808.
And I think as we said before, there is no plan to
dividend anything to the parent at this point. But I think
it's safe to say that if you took a reasonable risk-based
capital level of about 350 that there'd be an excess of
$100 million there.
Sheryl Skolnick: Okay. That's kind of what I thought.
And then is there -- and just two more questions and the
next one is a little one. With the hurricanes in Florida,
roughly 10% of your business, your lives presumably are
still in Florida on the individual side, have you seen any
evidence of increased cost trends in Florida at all?
Sam Miller: No we haven't. As a matter of fact, we've looked pretty
carefully at that and, although it's still kind of early
because you get some delays in billing and so forth.
We'd rather think - and this is only a guess on our part
because we have nothing solid - that any increased
utilization was kind of offset by people not going to
doctors during those particular times.
Sheryl Skolnick: Right.
Sam Miller: So we really haven't seen a net change one way or the
other that we can identify.
Sheryl Skolnick: Okay. The reason why I ask is that - and I realize that
these things are not necessarily reliable indicators -
but there did appear to be, on a PMPM basis, a $1 or so
increase in sequential costs for the fully insured base.
So it went from $125 to $126 a month.
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Sam Miller: And last year from the second to third quarter from $124
to $127. I mean I think that ...
Sheryl Skolnick: That's seasonal.
Sam Miller: That's pretty seasonal for us. Yeah.
Sheryl Skolnick: Okay. So...
John Lombardi: Sheryl, I think the best way to look at this - this is
John - is really on a year-to-date basis. You get a better
look at how we're doing and there you can see that its
gone down year-over-year.
Sheryl Skolnick: Right, well wait a minute, but excluding the PBM
settlement, I'm not sure it has.
Sam Miller: Right.
John Lombardi: True.
Sheryl Skolnick: Okay. Because it was 119 if I remember correctly in the
first quarter and I mean, we always have to remember to
subtract it.
Sam Miller: Yeah. That's right.
Sheryl Skolnick Okay. And then, one of the things that we're hearing about
in hospital land is the - there's some concern from their
perspective about the shifts from high-cost networks to
low-cost networks. I suspect as we're seeing in your
business as we get a shift from more - from less
affordable to more affordable and vis-a-vis your
anticipated combination with PacifiCare, you too will be
moving from a rented network to an owned network, one
presumes, post transaction.
Do you see - I mean, is that something that you see as
being a factor perhaps in the small group area that maybe
you're a little less competitive because you're using a
non-owned network?
Sam Miller: Sure. I don't think there's any secret in the fact that
our cost of care is - in our rented network, in some
cases, especially in big metropolitan areas where some of
our big competitors have better discounts - that our cost
of care is higher. That's why we've always
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tried to differentiate ourselves on product, on concept
and on customer service. Because heads up, cost-of-care to
cost-of-care, in some places, we have a disadvantage. That
disadvantage will go away in most of our overlapped states
which is, you know, California, or excuse me...
Sheryl Skolnick: Not California, Texas.
Sam Miller: In Arizona, Nevada, Texas, and Oklahoma and Colorado.
So...
Sheryl Skolnick: Right.
Sam Miller: Where PacifiCare has proprietary networks. And we will of
course go to use those networks as best we can in line
with whatever other contractual network relationships we
have.
Sheryl Skolnick: Of course. And then one final question, if I may. How
have the brokers and agents responded to the news of the
transaction?
Sam Miller: I think it's been very positive. I think in the
non-overlap states, PacifiCare in Michigan and Florida is
not unknown. But I think the halo effect of a big national
company is going to be positive. And then in the
overlapped states, I think PacifiCare has a consumer brand
that it will be very helpful.
Sheryl Skolnick: So they see it as additive to their portfolio of things
they can sell.
Sam Miller: Sure. I mean it's like everything else, you know, we're
in kind of a funny period. So there's the kind of unknown
until we can launch joint products and that kind of thing
next year.
Sheryl Skolnick: Understood. Well thank you very much gentlemen for
everything you've done for all these years. It's been a
great ride.
Sam Miller: Thank you.
Conference Coordinator: Once again if you would like to ask a question you may
do so by pressing star one on your touchtone phone. You
may withdraw your question at any time by pressing the
pound key.
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Our next question will come from the line of John Szabo of
CIBC World Market. Please go ahead.
John Szabo: Thanks. Good morning. Sam, I think at the time of the
transaction, you had said that you guys were working on a
Med-Sup product. Where are you with that? And then also,
could you give us a bit of a profile of your distribution
network? You know, how many of those brokers sell Med-Sup,
who's the typical provider, and I guess where I'm going
with this ultimately is, how easy do you think it's going
to be to load some of PacifiCare's products onto that
distribution network?
Sam Miller: Good. Good morning, John.
First of all, we're looking at Med-Sup because we thought
it could be a complimentary line. We no longer have to
look for a product or a platform because PacifiCare is in
that business and they're in that business in almost all
of the states we're in. And we will start looking as soon
as we possibly can at that. We've got 30,000 plus agents
and we think a number - a major subset of that, or at
least a subset of that 30,000 plus agents, sell Med-Sup.
And, of course, with our telephone telesales operation in
place now, with 25 plus people on the phone everyday
talking to 30 to 50 agents per day, we think we can find
the answer to your question out pretty quickly of how many
people sell Med-Sup and how many would be interested in
it. And we intend to do that as soon as practical and
within the bounds of, you know, legal bounds if you would.
So we think the Med-Sup business through our distribution
system is an exciting opportunity, and we will be working
on that as soon as we can.
John Szabo: Sam, is that product more like the typical commercial
individual product, in other words, you'll take
all comers in the agent network as opposed to maybe a
small group where you're concerned about adverse selection
and therefore try to concentrate the distribution a little
bit more?
Sam Miller: Yeah. I think the Med-Sup business is a fully underwritten
business and you can accept and reject folks, so I think
it's a take on all comers. I'm answering that question
without full knowledge about how PacifiCare really does
their Med-Sup business, but we would anticipate that we
can make that offering to almost all of our agents and
continue to use it as one more recruiting tool to why
people should, in the non-overlapped states, why they
should come to AMS for their individual, small group
and/or Med-Sup business.
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John Szabo: I mean, do you think that was a fairly significant
factor in terms of how much business you got from those
other lines? In other words, do you think the availability
of that Med-Sup could help your individual and small group
sales?
Sam Miller: I don't know about small group, but I think in the
individual side there's a lot of people that sell
individual and Med-Sup business. And then there will be a
new subset of agents who only sell Med-Sup, that today we
don't deal with, you know that aren't attracted to us, but
that with our existing recruitment platform and our
telesales operation that we can find those people and get
them on board.
John Szabo: Okay. Thanks and, again, best of luck and I'm assuming
this is going to be your last call. So, good luck to
you guys in the transaction.
Sam Miller: Thanks, John.
Conference Coordinator: Once again if you would like to ask a question you may
do so by pressing star one on your touchtone phone.
We have a follow-up question from Sheryl Skolnick of
Fulcrum Global Partners. Please go ahead.
Sheryl Skolnick: Thank you. I actually have two. The first one
is, I think on the last call we talked about you
re-engineering the small group sales force and broker
network along the lines of the successful strategy you
implemented on the MedOne side. Are you still moving
forward with that?
Sam Miller: I guess I'm at a little loss of what, you know...
Sheryl Skolnick: Well I thought that you did some retraining and
some repositioning, and you did some changes to the
structure of the network where you built up more, on your
own, sort of regional sales centers and some of that was
small group and some of that was MedOne. And I had the
impression that you were getting a lot of traction on the
MedOne side, that it was working well and that there were
still some moving parts and pieces on the small group
side. Is that not correct?
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Sam Miller: Well what we've done in our distribution is we've
added the telesales and MedOne specialists to the
contingent that's out dealing with agents. I don't know
that we've really re-engineered the group side so much. It
has had the net effect of allowing the district sales reps
to spend more time on groups, as the telesales people make
more contacts in the individual side.
But also, the DSRs are continuing to make individual
contacts as well and trying to ferret out larger producers
versus the occasional producer. We really see the
telesales people as out trying to cover the masses, if you
would, trying to get the occasional producer, and having
our salaried district sales reps throughout, you know,
feet on the street trying to find larger producers and
training them, and doing the training - face-to-face
training - for HSAs, HRAs, and so forth and the group side
of the HSA business. So, I guess there's been a shift in
some duties because as we rely more on mass contact to be
done by our telesales people; the specific contact and
training can be done by our DSRs.
Sheryl Skolnick: Okay. That was kind of - that was what I getting at.
Sam Miller: Yeah.
Sheryl Skolnick: Okay. And then, I guess I'll just ask it for the record,
do you have any comments or thoughts on the alleged
Spritzer investigation in the health insurance business?
Sam Miller: Well, first of all, I'll just say AMS has not been
contacted by any regulator or investigative body regarding
any of these matters.
Sheryl Skolnick: Okay.
Sam Miller: The bottom line is we really don't see a connection
between those serious matters raised and the way we do
business in our sector. We think that in a small group
and individual business, bid rigging is - when there's
four or five agents involved, bid rigging is kind of a
non-starter, you know. So we see no evidence of any of
that. And again we're not really in the large group
business. We probably have just a couple percent of
business that's over 50 employees. So we don't - we see
that this might relate more to the property and
casualty business than it does to the small group and
individual markets in the managed care sector. So we
don't really see any issues at this point. We continue to
review, and we're certainly for disclosure of any
compensation. We're totally, you know, in that camp.
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Sheryl Skolnick: Got it. Okay. And just a message from a
shareholder who tells me that they want to know where
you're going next because they're willing to invest with
you in the future. So I guess that says it all.
Sam Miller: The answer is PacifiCare.
Sheryl Skolnick: Right, well, okay, very good. Thanks so much.
Sam Miller: Sure.
Conference Coordinator: We have no further questions at this time.
I'll turn the call back over to Mr. Miller.
Sam Miller: First of all I just want to thank - to extend our
best wishes and thanks to the shareholders, analysts, and
other members of the financial community we worked with
over the past six years. We believe that the PacifiCare
merger serves the interest - their interest very well. And
we're delighted to conclude what is likely our final
conference call on such a positive note. Have a good day.
Thank you.
Conference Coordinator: This concludes today's conference call.
You may disconnect your line at any time.
END
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