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, 2003
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 by check mark, whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act).
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, 2003: 13,255,683 shares
AMERICAN MEDICAL SECURITY GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002.........................................................3
Condensed Consolidated Statements of Operations
Three months ended June 30, 2003 and 2002; Six months ended June 30, 2003 and 2002..........4
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002.....................................................5
Notes to Condensed Consolidated Financial Statements
June 30, 2003...............................................................................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.........................................18
Item 4. Controls and Procedures............................................................................18
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................19
Item 4. Submission of Matters to a Vote of Security Holders................................................20
Item 6. Exhibits and Reports on Form 8-K...................................................................21
Signatures.......................................................................................................22
Exhibit Index..................................................................................................EX-1
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(THOUSANDS, EXCEPT SHARE DATA) 2003 2002
--------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments:
Fixed maturity securities available for sale, at fair value $ 286,044 $ 278,222
Fixed maturity securities held to maturity, at amortized cost 3,168 4,288
Trading securities, at fair value 1,217 926
--------------------------------------------------------------------------------------------------------------------
Total investments 290,429 283,436
Cash and cash equivalents 22,036 30,620
Property and equipment, net 35,118 33,061
Goodwill, net 32,846 32,846
Other intangibles, net 2,383 2,860
Other assets 49,239 46,117
--------------------------------------------------------------------------------------------------------------------
Total assets $ 432,051 $ 428,940
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Medical and other benefits payable $ 131,023 $ 134,479
Advance premiums 16,453 15,200
Payables and accrued expenses 21,039 29,141
Notes payable 33,258 33,858
Other liabilities 27,860 33,512
--------------------------------------------------------------------------------------------------------------------
Total liabilities 229,633 246,190
Shareholders' equity:
Common stock (no par value, $1 stated value, 50,000,000 shares authorized,
16,654,315 issued and 13,253,928 outstanding at June 30, 2003,
16,654,315 issued and 12,905,898 outstanding at December 31, 2002) 16,654 16,654
Paid-in capital 192,362 189,813
Retained earnings 16,090 2,858
Accumulated other comprehensive income (net of taxes of
$5,365 at June 30, 2003 and $4,117 at December 31, 2002) 9,964 7,646
Treasury stock (3,400,387 shares at June 30, 2003
and 3,748,417 shares at December 31, 2002, at cost) (32,652) (34,221)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 202,418 182,750
--------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 432,051 $ 428,940
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
(THOUSANDS, EXCEPT PER COMMON SHARE DATA) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 178,776 $ 190,787 $ 357,831 $ 385,188
Net investment income 3,345 3,799 6,747 7,723
Net realized investment gains 91 48 466 62
Other revenue 4,562 4,938 9,348 10,343
--------------------------------------------------------------------------------------------------------------------
Total revenues 186,774 199,572 374,392 403,316
EXPENSES
Medical and other benefits 119,066 129,191 239,400 260,991
Selling, general and administrative 56,259 61,028 112,588 123,052
Interest expense 324 463 663 957
Amortization of intangibles 239 182 477 365
--------------------------------------------------------------------------------------------------------------------
Total expenses 175,888 190,864 353,128 385,365
--------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of a change in accounting principle 10,886 8,708 21,264 17,951
Income tax expense 4,117 3,467 8,032 7,280
--------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of a change in accounting principle 6,769 5,241 13,232 10,671
Cumulative effect of a change in accounting principle - - - (60,098)
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,769 $ 5,241 $ 13,232 $ (49,427)
====================================================================================================================
Earnings (loss) per common share - basic:
Income before cumulative effect of a
change in accounting principle $ 0.51 $ 0.42 $ 1.01 $ 0.81
Cumulative effect of a change in accounting
principle - - - (4.55)
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.51 $ 0.42 $ 1.01 $ (3.74)
====================================================================================================================
Earnings (loss) per common share - diluted:
Income before cumulative effect of a
change in accounting principle $ 0.48 $ 0.38 $ 0.96 $ 0.76
Cumulative effect of a change in accounting
principle - - - (4.27)
--------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.48 $ 0.38 $ 0.96 $ (3.51)
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
AMERICAN MEDICAL SECURITY GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
-----------------------------
(THOUSANDS) 2003 2002
--------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 13,232 $ (49,427)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Cumulative effect of a change in accounting principle - 60,098
Depreciation and amortization 4,995 4,410
Net realized investment gains (466) (62)
Increase in trading securities (291) (237)
Deferred income tax expense (benefit) 750 (8,457)
Changes in operating accounts:
Other assets (4,980) 4,751
Medical and other benefits payable (3,456) (3,554)
Advance premiums 1,253 (1,311)
Payables and accrued expenses (8,102) (3,691)
Other liabilities (4,532) 828
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,597) 3,348
INVESTING ACTIVITIES
Purchases of available for sale securities (62,024) (94,875)
Proceeds from sale of available for sale securities 56,532 107,747
Proceeds from maturity of available for sale securities 1,775 1,500
Purchases of held to maturity securities - (1,925)
Proceeds from maturity of held to maturity securities - 1,925
Purchases of property and equipment (5,530) (4,461)
Proceeds from sale of property and equipment 2 6
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (9,245) 9,917
FINANCING ACTIVITIES
Issuance of common stock 3,518 1,307
Purchase of treasury stock (660) (19,540)
Repayment of notes payable (600) (5,600)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,258 (23,833)
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Net decrease (8,584) (10,568)
Balance at beginning of year 30,620 24,975
--------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 22,036 $ 14,407
====================================================================================================================
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
AMERICAN MEDICAL SECURITY GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003
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. 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 months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. 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. (the "Company")
annual report on Form 10-K for the year ended December 31, 2002.
2. STOCK-BASED COMPENSATION
The Company has stock-based compensation plans for the benefit of eligible
employees and directors of the Company, which are described more fully in Note
10 in the Company's 2002 Annual Report on Form 10-K. The Company follows
Accounting Principles Board Opinion No. 25, the intrinsic value method of
accounting for stock-based compensation, and no compensation expense is recorded
because the exercise price of the Company's employee stock options equaled the
market price of the underlying stock on the date of grant. The following table
illustrates the pro forma net income and pro forma earnings per share as if the
Company had followed the fair value method of accounting for stock-based
compensation under Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123").
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
(THOUSANDS, EXCEPT PER COMMON SHARE DATA) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 6,769 $ 5,241 $ 13,232 $ (49,427)
Pro forma stock compensation expense
in accordance with Statement 123, net of tax (427) (425) (811) (691)
-------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 6,342 $ 4,816 $ 12,421 $ (50,118)
===================================================================================================================
Net income (loss) per common share, as reported:
Basic $ 0.51 $ 0.42 $ 1.01 $ (3.74)
Diluted $ 0.48 $ 0.38 $ 0.96 $ (3.51)
Pro forma income (loss) per common share:
Basic $ 0.48 $ 0.38 $ 0.95 $ (3.80)
Diluted $ 0.45 $ 0.35 $ 0.90 $ (3.58)
In determining compensation expense in accordance with Statement 123, the fair
value of options was estimated at the date of grant using the Black-Scholes
option valuation model, which is commonly used in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of highly subjective assumptions
including the expected stock price volatility and the expected life of the
options. Since the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
6
3. 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 was subject to an initial impairment test in
accordance with Statement 142, and any remaining balance of goodwill is subject
to continuing impairment testing at least annually. Future goodwill impairments,
if any, will be classified as operating expenses in the Company's statement of
operations. As a result of this initial impairment test, the Company recognized
a non-cash goodwill impairment charge of approximately $60.1 million recorded as
a cumulative effect of a change in accounting principle as of January 1, 2002.
The impairment charge had no impact on cash flows or the statutory-basis capital
and surplus of the Company's insurance subsidiaries.
4. EARNINGS PER COMMON SHARE ("EPS")
Basic EPS is computed by dividing earnings by the weighted average number of
common shares outstanding. Diluted EPS is computed by dividing earnings by the
weighted average number of common shares outstanding, adjusted for the effect of
dilutive employee stock options.
The following table illustrates the computation of EPS for income before
cumulative effect of a change in accounting principle 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) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------
Numerator:
Income before cumulative effect
of a change in accounting principle $ 6,769 $ 5,241 $ 13,232 $ 10,671
===================================================================================================================
Denominator:
Denominator for basic EPS 13,160 12,615 13,071 13,206
Effect of dilutive employee stock options 855 1,066 724 879
-------------------------------------------------------------------------------------------------------------------
Denominator for diluted EPS 14,015 13,681 13,795 14,085
===================================================================================================================
Earnings per common share before cumulative
effect of a change in accounting principle:
Basic $ 0.51 $ 0.42 $ 1.01 $ 0.81
Diluted $ 0.48 $ 0.38 $ 0.96 $ 0.76
===================================================================================================================
Certain options to purchase shares of common stock were not included in the
computation of diluted earnings per common share for the three and six months
ended June 30, 2003 and 2002 because the options' exercise prices were greater
than the average market price of the outstanding common shares for the period.
7
5. 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) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,769 $ 5,241 $ 13,232 $ (49,427)
Unrealized gain on available for sale securities 1,874 3,125 2,318 1,148
-------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 8,643 $ 8,366 $ 15,550 $ (48,279)
===================================================================================================================
6. CONTINGENCIES
In February 2000, a class action lawsuit was filed against the Company in the
state of Florida alleging that the Company failed to follow Florida law when it
discontinued writing certain health insurance policies and offering new policies
in 1998. Plaintiffs claim that the Company wrongfully terminated coverage,
improperly notified insureds of conversion rights and charged improper premiums
for new coverage. Plaintiffs also allege that the Company's renewal rating
methodology violated Florida law. On April 24, 2002, a Circuit Court Judge ruled
against the Company and ordered the question of damages be tried before a jury
at a later date. A new judge has been assigned to the case and the parties are
awaiting the setting of a trial date. The earliest the Company expects the trial
to be held is late first quarter 2004.
In a separate administrative proceeding involving substantially similar facts,
the Florida Department of Insurance issued an administrative complaint against
the Company in May 2001 challenging certain of the Company's rating and other
practices in Florida relating to its MedOne(R) products for individuals and
their families. In April 2002, an administrative law judge found in favor of the
Company on all issues, held that the evidence presented by the Florida
Department of Insurance did not support a conclusion that the Company had
violated any provisions of Florida law and recommended that all counts of the
complaint be dismissed. In July 2002, the Florida Department of Insurance
affirmed the recommendations from the judge with respect to six of eight counts.
However, the Department reversed the judge's finding that the Company did not
violate state law and ordered the suspension of the Company's license to sell
new business in Florida for one year. On April 23, 2003, the First District
Court of Appeals for the State of Florida affirmed that the Company did not
violate Florida laws through its rating practices and reversed the order by the
Florida Department of Insurance. On July 11, 2003, the Court of Appeals denied
the Florida Department of Insurance's request for a rehearing. This matter has
no direct impact on the class action lawsuit discussed in the previous
paragraph.
The Company is a defendant in a number of lawsuits in various states, primarily
Alabama, alleging misrepresentation of the rating methodology used by the
Company with respect to certain MedOne(R) products purchased by the plaintiffs.
These lawsuits commonly seek unspecified damages for misrepresentation and
emotional distress in addition to punitive damages. Some of these cases involve
multiple plaintiffs. The cases are in various stages of litigation. The Company
believes that these lawsuits are unfounded because the Company properly
disclosed the nature of the products sold. The Company also believes the subject
matter of the lawsuits falls under the primary jurisdiction of state insurance
departments. The Company is vigorously defending itself in these actions.
The Company is involved in various other legal and regulatory actions occurring
in the normal course of business. 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.
8
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(R) (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
intangibles and unallocated overhead expenses). 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. Significant intercompany
transactions have been eliminated prior to reporting segment information.
A reconciliation of segment income (loss) before income taxes to consolidated
income before income taxes and cumulative effect of a change in accounting
principle is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------
(THOUSANDS) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
Health segment $ 9,654 $ 8,110 $ 18,706 $ 16,452
Life segment 1,524 1,512 2,927 2,935
All other (292) (914) (369) (1,436)
--------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of a change in accounting principle $ 10,886 $ 8,708 $ 21,264 $ 17,951
====================================================================================================================
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) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 175,703 $ 187,314 $ 351,627 $ 378,034
Net investment income 1,683 1,809 3,398 3,743
Other revenue 3,762 4,063 7,725 8,523
--------------------------------------------------------------------------------------------------------------------
Total revenues 181,148 193,186 362,750 390,300
EXPENSES
Medical and other benefits 118,388 128,185 237,907 258,749
Selling, general and administrative 53,106 56,891 106,137 115,099
--------------------------------------------------------------------------------------------------------------------
Total expenses 171,494 185,076 344,044 373,848
--------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 9,654 $ 8,110 $ 18,706 $ 16,452
====================================================================================================================
Loss ratio 67.4% 68.4% 67.7% 68.4%
Expense ratio 28.1% 28.2% 28.0% 28.2%
--------------------------------------------------------------------------------------------------------------------
Combined ratio 95.5% 96.6% 95.6% 96.6%
====================================================================================================================
Health membership at end of period:
Fully insured medical 275,323 319,675
Self funded medical 42,568 43,058
Dental 228,610 235,250
------------------------------------------------------------------------------------
Total health membership 546,501 597,983
====================================================================================
9
Three Months Ended Six Months Ended
LIFE SEGMENT June 30, June 30,
------------------------------------------------------------
(THOUSANDS) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
REVENUES
Insurance premiums $ 3,073 $ 3,473 $ 6,204 $ 7,151
Net investment income 129 153 262 303
Other revenue 73 29 148 61
--------------------------------------------------------------------------------------------------------------------
Total revenues 3,275 3,655 6,614 7,515
EXPENSES
Medical and other benefits 679 1,017 1,516 2,235
Selling, general and administrative 1,072 1,126 2,171 2,345
--------------------------------------------------------------------------------------------------------------------
Total expenses 1,751 2,143 3,687 4,580
--------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 1,524 $ 1,512 $ 2,927 $ 2,935
====================================================================================================================
Loss ratio 22.1% 29.3% 24.4% 31.3%
Expense ratio 32.5% 31.6% 32.6% 31.9%
--------------------------------------------------------------------------------------------------------------------
Combined ratio 54.6% 60.9% 57.0% 63.2%
====================================================================================================================
Life membership at end of period 141,930 166,857
==================================================================================
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 medical insurance for
small employer groups and medical insurance marketed to individuals and their
families ("MedOne(R)"). The Company also offers dental, life, prescription drug,
disability and accidental death insurance, and provides self funded benefit
administration. The Company has two reportable segments: health insurance
products (which accounted for approximately 97% of the Company's total revenues
for the quarters ended June 30, 2003 and 2002) and life insurance products. 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. 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 $6.8 million or $0.48 per diluted share for
the three months ended June 30, 2003, compared to net income of $5.2 million or
$0.38 per diluted share for the corresponding period in the prior year. For the
six month period ended June 30, 2003, the Company reported net income of $13.2
million or $0.96 per diluted share, compared with income before cumulative
effect of a change in accounting principle of $10.7 million or $0.76 per diluted
share for the same period of the prior year. Effective January 1, 2002, the
Company adopted a new accounting standard. See Note 3 to the Company's Condensed
Consolidated Financial Statements for a discussion of the impact of adopting
this accounting standard.
The improvement in profitability from the prior year resulted principally from a
lower health loss ratio as premiums per member per month continued to increase
faster than claims per member per month. The improvement in the loss ratio is
primarily attributed to management's strategic actions 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.
INSURANCE PREMIUM REVENUE AND MEMBERSHIP
Insurance premium revenue for the three months ended June 30, 2003 decreased
6.3% to $178.8 million from $190.8 million for the corresponding period in 2002.
For the six months ended June 30, 2003, insurance premium revenue declined 7.1%
to $357.8 million from $385.2 million in the same period of the prior year. The
decrease primarily resulted from a decline in membership. Total health
membership declined from 597,983 members at June 30, 2002 to 546,501 members at
June 30, 2003. Management believes the membership decrease from the prior year
is due to several factors, including premium rate increases resulting in lower
new sales and higher lapse rates on existing business, negative national
publicity surrounding the Company's MedOne(R) rating practices and related legal
matters, the difficulty individuals and small employer groups face in affording
increasing health insurance premiums and the effect of a declining economy with
many employer groups ceasing business or being forced to layoff or downsize
their workforce. Partially offsetting the effect of declining membership was the
rise in premium rates on the continuing block of business. Net realized average
fully insured medical premium per member per month for the second quarter of
2003 increased by 7.8% compared to the second quarter of 2002.
Management is committed to attaining membership and revenue growth through the
introduction of innovative products designed to meet the changing needs of
today's consumers and through expanded sales support. The Company has introduced
new products with flexible benefit designs and has equipped its sales force with
an innovative tool to help employers manage their health benefit costs in an
inflationary environment. Enhanced customer service programs are also in place
to encourage retention of the Company's existing business. Management believes
these actions, along with a disciplined approach to pricing and tight expense
control, will lead to revenue and membership growth by the end of 2003.
11
NET INVESTMENT INCOME
Net investment income, including net realized investment gains, was $3.4 million
for the three months ended June 30, 2003, compared to $3.8 million for the same
period in 2002. Net investment income also declined for the six month period
ended June 30, 2003 to $7.2 million from $7.8 million for the same period in the
prior year. The decrease in net investment income is due primarily to a decrease
in the average annualized investment yield. The average annualized investment
yield was 4.9% for the first half of 2003 compared to 5.8% for the first six
months of the prior year. The decrease was partially offset by an increase in
net realized investment gains of $0.4 million during the first half of 2003.
OTHER REVENUE
Other revenue, which primarily consists of administrative fee income from claim
processing on self funded business and other administrative services, decreased
to $4.6 million for the three months ended June 30, 2003 from $4.9 million for
the three months ended June 30, 2002 resulting from the Company's decrease in
membership. On a year-to-date basis, for the first six months, other revenue
declined to $9.3 million from $10.3 million for the first six months of 2002.
LOSS RATIO
The health segment loss ratio for the second quarter of 2003 was 67.4% compared
to 68.4% for the second quarter of 2002. For the six months ended June 30, the
health segment loss ratio was 67.7% in 2003, compared to 68.4% in 2002. The
improvement in the health segment loss ratio is due to repricing efforts and
claims cost control initiatives. Claims costs per member per month have
increased slightly, compared to the same periods in the prior year, but were
surpassed by increased premiums per member per month. The loss ratio for the
life segment, which represents less than 3% of the Company's total revenues, was
favorable at 22.1% for the three months ended June 30, 2003, compared with 29.3%
for the corresponding period of the prior year. The Company's loss ratio is also
impacted by changes in the estimated cost to settle or resolve claims-related
litigation. Management closely monitors developments in litigation and emerging
trends in claims costs to determine the adequacy and reasonableness of the
Company's related reserves, and adjusts such reserves when necessary.
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 the health segment
for the three months ended June 30, 2003 remained relatively stable at 28.1%
compared with 28.2% for the second quarter of the prior year and improved to
28.0% for the six month period ended June 30, 2003 from 28.2% reported for the
same period of 2002. The improvement was the result of management's efforts to
control costs as revenues declined.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash 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 medical and
other benefits and other operating expenses. The Company's investment policies
are structured to provide sufficient liquidity to meet anticipated payment
obligations.
The Company's cash used in operations was $1.6 million for the six months ended
June 30, 2003, compared to cash provided by operations of $3.3 million for the
corresponding period in the prior year. The decrease in cash flow resulted from
prepaid maintenance fees related to the Company's technology modernization
initiatives, as well as other annual expenditures made during the period.
Consistent with the Company's historical cash flow trend, management anticipates
improved cash flow during the last half of the year.
12
The Company's investment portfolio consists primarily of investment grade bonds
and has limited exposure to equity securities. At June 30, 2003 and December 31,
2002, 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, 2003
and December 31, 2002, 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, real estate
held for investment or financial derivatives.
The Company maintains a revolving bank line of credit agreement with a maximum
available facility of $50.0 million. The agreement provides for a lump-sum
repayment of outstanding advances at the end of 2005. At June 30, 2003, the
outstanding balance of advances under the credit agreement was $30.2 million.
The credit agreement contains customary covenants which, among other matters,
require the Company to achieve certain minimum financial results, prohibit the
Company from paying future cash dividends and restrict or limit the Company's
ability to incur additional debt and dispose of assets outside the ordinary
course of business. The Company was in compliance with all such covenants at
June 30, 2003. 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, the Company's principal insurance subsidiary.
The Company's insurance subsidiaries operate in states that require certain
levels of regulatory capital and surplus and may restrict the amount of
dividends that may be paid to their parent company. The insurance regulator in
the insurer's state of domicile may disapprove any dividend which, together with
other dividends paid by an insurance company 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 the financial statements of the Company's insurance subsidiaries as
of December 31, 2002, as filed with the insurance regulators, the aggregate
amount available for dividend without regulatory approval is $11.3 million.
The Company currently does not pay any cash dividends and employs its earnings
in the continued development of its business. The Company's future dividend
policy will depend on its earnings, capital requirements, debt covenant
restrictions, financial condition and other factors considered relevant by the
Company's Board of Directors.
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, 2002, each of the Company's insurance
subsidiaries had RBC ratios that were substantially above the levels which would
require Company or regulatory action.
In an effort to continue supporting business growth, operational efficiency,
service improvements and future administrative cost savings, the Company's
management approved a plan to invest in an enterprise-wide information
technology modernization project. The project involves the purchase of software
applications and the utilization of internal and external technology and
consulting resources to support most of the Company's major business processes.
The design and development of the software applications began during the first
quarter of 2003, with a phased implementation scheduled over the next three
years. As a result of the information technology modernization project,
management anticipates total capital expenditures in 2003 will be approximately
$12.0 million. Management believes that the Company's existing working capital,
operating cash flow and, if necessary, available facility under its current
credit agreement, will be sufficient to fund the Company's anticipated capital
expenditures related to this project.
In January 2003, the Company's Board of Directors approved a share repurchase
program, which provides the Company with the authority to repurchase up to $10.0
million of its outstanding common shares. The plan allows the Company to buy
back its shares, from time to time, in open market or privately negotiated
transactions, subject to price and market conditions. Management expects the
share repurchase program will be funded through operating cash flow. During the
first quarter of 2003, the Company repurchased 52,700 shares of its common stock
at an average market price of $12.46 per share, and at an aggregate cost of $0.7
million. During the second quarter of 2003, the Company did not repurchase any
shares of its common stock.
13
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. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Forward-looking statements are subject to risks and
uncertainties that could cause the 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 impact the Company's
business and financial prospects include, but are not limited to, those
discussed below and those discussed from time to time in the Company's various
filings with the Securities and Exchange Commission or in other publicly
disseminated written documents:
MEDICAL CLAIMS AND HEALTH CARE COSTS. If the Company is unable to accurately
estimate medical claims and control health care costs, its results of operations
may be materially adversely affected.
The Company estimates the costs of its future medical claims and other expenses
using actuarial methods based upon historical data, medical inflation, product
mix, seasonality, utilization of health care services and other relevant
factors. The Company establishes premiums based on these methods. The premiums
the Company charges its customers generally are fixed for one-year periods, and
therefore, costs the Company incurs in excess of its medical claim projections
generally are not recovered in the contract year through higher premiums.
Certain factors may and often do cause actual health care costs to vary from
what the Company estimated and reflected in premiums. These factors may include,
but not be limited to: (1) an increase in the rates charged by providers of
health care services and supplies, including pharmaceuticals; (2) higher than
expected use of health care services by members; (3) the occurrence of
bioterrorism, catastrophes or epidemics; (4) changes in the demographics of
members and medical trends affecting them; and (5) new mandated benefits or
other regulatory changes that increase the Company's costs.
The occurrence of any of these factors, which are beyond the Company's control,
could result in a material adverse effect on its business, financial condition
and results of operations.
GOVERNMENT REGULATIONS. The Company conducts business in a heavily regulated
industry, and changes in government regulation could increase the costs of
compliance or cause the Company to discontinue marketing its products in certain
states.
The Company's business is extensively regulated by federal and state
authorities. Some of the new federal and state regulations promulgated under the
Health Insurance Portability and Accountability Act of 1996, or HIPAA, relating
to health care reform require the Company to implement changes in its programs
and systems in order to maintain compliance. The Company has incurred
significant expenditures as a result of HIPAA regulations and expects to
continue to incur expenditures as various regulations become effective.
The Company is subject to periodic changes in state laws and regulations
regarding the selection and pricing of risks and other matters. New regulations
regarding these issues could increase the Company's costs and decrease its
premiums. The Company has in the past decided, and may in the future decide, to
discontinue marketing its products in states that have enacted, or are
considering, various health care reform regulations that would impair the
Company's ability to market its products profitably.
Federal and state legislatures also are considering health care reform measures,
which may result in higher medical costs. Congress is considering legislation
allowing small employers to form association health plans exempt from state
insurance regulations, which may impact the risk profile of employers willing to
purchase insurance from the Company. In addition, the implementation of "prompt
pay" laws, whereby a claim must be paid in a certain number of days regardless
of whether it is a valid claim or not, subject to a right of recovery, may have
a negative effect on the Company's results of operations.
14
REGULATORY COMPLIANCE. The Company's failure to comply with new or existing
government regulation could subject it to significant fines and penalties.
The Company's efforts to measure, monitor and adjust its business practices to
comply with the law are ongoing. Failure to comply with enacted regulations,
including the laws mentioned above, could require the Company to pay refunds or
result in significant fines, penalties, or the loss of one or more of its
licenses. The Company has been subject to regulatory penalties, assessments and
restitution orders in a number of states in which it operates. For information
concerning a regulatory proceeding in Florida, see Part II, Item 1, "Legal
Proceedings." From time to time the Company is also subject to inquiries in
other states related to its activities and practices. Furthermore, federal and
state laws and regulations continue to evolve. The costs of compliance may cause
the Company to change its operations significantly, or adversely impact the
health care provider networks with which the Company does business, which may
adversely affect its business and results of operations.
LITIGATION. The Company is subject to class actions and other forms of
litigation in the ordinary course of its business, including litigation based on
new or evolving legal theories, which could result in significant liabilities
and costs.
For example, a Florida Circuit Court has found the Company liable for damages in
a class action lawsuit in Florida. The parties are awaiting the setting of a
trial date to determine damages. Further, the Company is involved in a number of
lawsuits in various states that allege misrepresentation by the Company of its
renewal rating methodology. For additional information, see Part II, Item 1,
"Legal Proceedings."
The nature of the Company's business subjects it to a variety of legal actions
and claims relating but not limited to the following: (1) denial of health care
benefits; (2) disputes over rating methodology and practices or termination of
coverage; (3) disputes with agents over compensation or other matters; (4)
disputes related to claim administration errors and failure to disclose network
rate discounts and other fee and rebate arrangements; (5) disputes over
co-payment calculations; and (6) customer audits of compliance with the
Company's plan obligations.
The Company cannot predict with certainty the outcome of lawsuits against the
Company or the potential costs involved.
COMPETITION. Competition in the Company's industry may limit its ability to
attract new members or to maintain its existing membership in force.
The Company operates in a highly competitive environment. The Company competes
primarily on the basis of price, benefit plan design, strength of provider
networks, quality of customer service, reputation and quality of agent
relations. The Company competes for members with other health insurance
providers and managed care companies, many of whom have larger membership in
regional markets and greater financial resources. The Company cannot provide
assurance that it will be able to compete effectively in this industry. As a
result, the Company may be unable to attract new members or maintain its
existing membership and its revenues may be adversely affected.
BUSINESS GROWTH STRATEGY. The Company's future operating performance is largely
dependent on its ability to execute its growth strategy.
The Company has experienced a decline in membership over the last several years
as part of its strategy to improve profitability and exit certain markets. The
Company's challenge is to increase the number of individuals and small employer
groups purchasing its products and services while encouraging its current
preferred membership to retain their business relationship with the Company. The
Company has expanded and realigned its sales organization, introduced new
products, established new distribution channels for its MedOne(R) products,
expanded its agent recruitment efforts and developed incentive programs to
improve productivity. Also impacting the Company's growth prospects is the
affordability of health insurance premiums as health care costs rise and the
downsizing of small employer workforces as a result of the soft economy. If the
Company initiatives are not successful and the Company does not meet its growth
goals, the Company's future operating performance may be adversely affected.
15
INFORMATION SYSTEMS. A failure of the Company's information system could
adversely affect its business.
Information processing is critical to the Company's business. The Company
depends on its information system for timely and accurate information. The
Company's failure to maintain an effective and efficient information system or
disruptions in its information system could cause disruptions in its business
operations, including any of the following: (1) failure to comply with prompt
pay laws; (2) loss of existing members; (3) difficulty in attracting new
members; (4) disputes with members, providers and agents; (5) regulatory
problems; (6) increases in administrative expenses; and (7) other adverse
consequences.
The Company is investing in an enterprise-wide information technology
modernization project involving the purchase of software applications to support
most of the Company's major processes. The design and development of the
software applications began in early 2003, with a phased implementation
scheduled over the next few years. Although the Company is taking measures to
safeguard against disruptions to its information systems during this process, it
cannot provide assurance that disruptions will not occur or that the project
will be successfully implemented or implemented on schedule.
INDEPENDENT AGENT RELATIONSHIPS. The Company depends on the services of
non-exclusive independent agents and brokers to market its products to potential
customers. These agents and brokers frequently market the health insurance
products of competitors as well as the Company's products. Most of the Company's
contracts with agents and brokers are terminable without cause upon 30-days
notice by either party. The Company faces intense competition for the services
and allegiance of independent agents and brokers. The Company cannot provide
assurance that they will continue to market the Company's products in the future
or that they will not refer the Company's members to competitors.
NEGATIVE PUBLICITY. Negative publicity regarding the Company's business
practices and about the health insurance industry may harm the Company's
business and operating results.
In 2002, the Company was subject to negative national publicity surrounding its
MedOne(R) rating practices and related legal matters, which management believes
harmed the Company's MedOne(R) new member enrollment during the last half of
2002. The Company changed its rating practices in all MedOne(R) markets
effective January 1, 2003. Adverse publicity about the Company's rating
practices or other matters in the future may affect sales of the Company's
products, which could impede the Company's growth plans.
In addition, the health insurance industry, in general, has received negative
publicity and does not have a positive public perception. This publicity and
perception may lead to increased legislation, regulation, review of industry
practices and private litigation. These factors may adversely affect the
Company's ability to market its products and increase the regulatory burdens
under which the Company operates, further increasing the costs of doing business
and adversely affecting operating results.
INSURANCE RISK MANAGEMENT. If the Company's insurers or reinsurers do not
perform their obligations or offer affordable coverage with reasonable
deductibles or limits, the Company could experience significant losses.
The Company's risk management program includes several insurance policies it has
purchased to cover various property, business and other risks of loss. In
addition, the Company carries policies to cover its directors and officers. Many
of the carriers marketing these lines of coverage are experiencing unfavorable
claims experience and loss of their own reinsurance coverage. Several carriers
have exited markets and no longer offer certain lines of coverage. Accordingly,
there is no assurance that the Company will be able to purchase insurance
coverages for its own risk management at affordable premiums or with reasonable
deductibles and policy limits.
The Company has entered into and may continue to enter into a variety of
reinsurance arrangements under which it cedes business to other insurance
companies to mitigate large claims risk. Although reinsurance allows for greater
diversification of risk relating to potential losses arising from large claims,
the Company remains liable if these other insurance companies fail to perform
their obligations. As a result, any failure of an insurance company to perform
its obligations under an agreement could expose the Company to significant
losses. Also, there is no assurance that the Company will be able to purchase
reinsurance at affordable premiums.
16
PERSONNEL. Loss of key personnel and the inability to attract and retain
qualified employees could have a material adverse impact on the Company's
operations.
The Company is dependent on the continued services of its management team,
including its key executives. Loss of such personnel without adequate
replacement could have a material adverse effect on the Company. Members of the
Company's senior management have developed relationships with some of the
Company's independent agents and brokers. If the Company is unable to retain
these employees, the loss of their services could adversely impact the Company's
ability to maintain relations with certain independent agents and brokers who
market the Company's products. Additionally, the Company needs qualified
managers and skilled employees with insurance industry experience to operate its
businesses successfully. From time to time there may be shortages of skilled
labor that may make it more difficult and expensive for the Company to attract
and retain qualified employees. If the Company is unable to attract and retain
qualified individuals or its costs to do so increase significantly, its
operations could be materially adversely affected.
PROVIDER NETWORK RELATIONSHIPS. The Company's inability to enter into or
maintain satisfactory relationships with provider networks could harm
profitability.
The Company's profitability could be adversely impacted by its inability to
contract on favorable terms with networks of hospitals, physicians, dentists,
pharmacies and other health care providers. The failure to secure cost-effective
health care provider network contracts may result in a loss of membership or
higher medical costs. In addition, the inability to contract with provider
networks, the inability to terminate contracts with existing provider networks
and enter into arrangements with new provider networks to serve the same market
or the inability of providers to provide adequate care, could adversely affect
the Company's results of operations.
A.M. BEST INSURANCE RATING. If the Company's insurance subsidiaries are not able
to maintain their current rating by A.M. Best Company, the Company's results of
operations could be materially adversely affected.
The Company's insurance subsidiaries are assigned a rating by A.M. Best Company,
a nationally recognized rating agency. The rating reflects A.M. Best Company's
opinion of the insurance subsidiaries' financial strength, operating results and
ability to meet their ongoing obligations. Decreases in operating performance
and other financial measures may result in a downward adjustment of A.M. Best
Company's rating of the insurance subsidiaries. In addition, other factors
beyond the Company's control such as general downward economic cycles and
changes implemented by the rating agencies, including changes in the criteria
for the underwriting or the capital adequacy model, may result in a decrease in
the rating. A downward adjustment in A.M. Best's rating of the Company's
insurance subsidiaries could cause the Company's agents or potential customers
to look at the Company with less favor, which could have a material adverse
effect on the Company's results of operations.
REGULATION LIMITING TRANSFER OF FUNDS. Regulations governing the Company's
insurance subsidiaries could affect its ability to satisfy its obligations to
creditors as they become due, including obligations under the Company's credit
facility.
The Company's insurance subsidiaries are subject to regulations that limit their
ability to transfer funds to it. If the Company is unable to obtain funds from
its insurance subsidiaries, it will experience reduced cash flow, which could
affect the Company's ability to pay its obligations to creditors as they become
due. The Company will be required to make a lump-sum payment of the total
principal amount of outstanding balances under its credit facility at the end of
2005. The Company's outstanding balance at June 30, 2003 was $30.2 million. If
the Company's insurance subsidiaries are unable to provide these funds, the
Company could default on its obligations under the credit facility.
CAPITAL AND SURPLUS REQUIREMENTS. If the Company's regulated insurance
subsidiaries are not able to comply with state capital standards, state
regulators may require the Company to take certain actions that could have a
material adverse effect on its results of operations and financial condition.
17
State regulations govern the amount of capital required to be retained in the
Company's regulated insurance subsidiaries and the ability of those regulated
subsidiaries to pay dividends. Those state regulations include the requirement
to maintain minimum levels of statutory capital and surplus, including meeting
the requirements of the risk-based capital standards promulgated by the National
Association of Insurance Commissioners. State regulators have broad authority to
take certain actions in the event those capital requirements are not met. Those
actions could significantly impact the way the Company conducts its business,
reduce its ability to access capital from the operations of its regulated
insurance subsidiaries and have a material adverse effect on its results of
operations and financial condition. Any new minimum capital requirements adopted
in the future through state regulation may increase the Company's capital
requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk has not substantially changed from the year ended
December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
the information the Company must disclose in its filings with the Securities and
Exchange Commission is recorded, processed, summarized and reported on a timely
basis. The Company's principal executive officer and principal financial officer
have reviewed and evaluated the Company's disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the period covered by
this report. Based on such evaluation, such officers have concluded that, as of
June 30, 2003, the Company's disclosure controls and procedures are effective in
bringing to their attention on a timely basis material information relating to
the Company required to be included in the Company's periodic filings under the
Exchange Act. There have been no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
18
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,
2002, and Item 1, Legal Proceedings, in the Company's quarterly report on Form
10-Q for the quarter ended March 31, 2003.
In May 2001 an administrative complaint issued by the Florida Department of
Insurance was filed against the Company's wholly owned subsidiary, United
Wisconsin Life Insurance Company ("UWLIC") challenging UWLIC's rating and other
practices in Florida relating to its MedOne(R) products for individuals and
their families. In an order entered April 25, 2002, an Administrative Law Judge
recommended dismissal of all counts of the Department's administrative
complaint. 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 However, the Department reversed the
Administrative Law Judge's finding that the Company did 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. On April 23, 2003, the
First District Court of Appeals for the State of Florida (the "Court of
Appeals") reversed the order by the Florida Department of Insurance that would
have suspended UWLIC's license. Further, on July 11, 2003, the Court of Appeals
denied the Florida Department of Insurance's request for a rehearing. The Court
of Appeals decision reaffirms the Administrative Law Judge's opinion that
UWLIC's rating practices violated no Florida laws as charged in the complaint.
In a separate action involving substantially similar facts, a class action
lawsuit was filed against two of the Company's wholly owned subsidiaries,
American Medical Security, Inc. ("AMS") and UWLIC in the Circuit Court for Palm
Beach County, Florida, by Evelyn Addison and others in February 2002 alleging
that the Company failed to follow Florida law when it discontinued writing
certain health insurance policies and offering new policies in 1998. Plaintiffs
claim that the Company wrongfully terminated coverage, improperly notified
insureds of conversion rights and charged improper premiums for new coverage.
Plaintiffs also allege that UWLIC's renewal rating methodology violated Florida
law. In a final judgment entered April 24, 2002, the Circuit Court Judge 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 at a later date. A new judge
has been assigned to the case and the parties are awaiting the setting of a
trial date. The earliest the Company expects the trial to be held is late first
quarter 2004. The administrative matter discussed in the preceding paragraph has
no direct impact on the class action lawsuit.
The Company's subsidiaries, AMS and UWLIC, are defendants in a number of
lawsuits in various states, primarily Alabama, alleging misrepresentation of the
rating methodology used by the Company with respect to certain MedOne(R)
products purchased by the plaintiffs. These lawsuits commonly seek unspecified
damages for misrepresentation and emotional distress in addition to punitive
damages. Some of these cases involve multiple plaintiffs. The cases are in
various stages of litigation. The Company believes that these lawsuits are
unfounded because the Company properly disclosed the nature of the products
sold. The Company also believes the subject matter of the lawsuits falls under
the primary jurisdiction of state insurance departments. The Company is
vigorously defending itself in these actions.
The Company is involved in various other legal and regulatory actions occurring
in the normal course of business. 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.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on May 21, 2003 for
the purpose of (1) electing three directors for terms expiring at the 2006
annual meeting of shareholders, (2) amending the Company's Restated Articles of
Incorporation to reduce from 75% to 66-2/3% the requisite shareholder vote to
approve future amendments to certain provisions of the Company's Restated
Articles of Incorporation, (3) amending the Company's Restated Articles of
Incorporation to reduce the size of the Board of Directors from a range of 9 to
15 directors to a range of 8 to 12 directors, (4) amending the Company's
Restated Articles of Incorporation to eliminate the designation of Series A
Adjustable Rate Nonconvertible Preferred Stock, and (5) amending and
re-approving the Company's Executive Annual Incentive Plan.
Shareholders elected all three of the Company's nominees for director, approved
the three amendments to the Company's Restated Articles of Incorporation, and
amended and re-approved the Company's Executive Annual Incentive Plan. The
voting results for the proposals were as follows:
ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2006:
W. Francis Brennan: Frank L. Skillern:
For 11,374,362 shares For 11,399,814 shares
Withheld 210,921 shares Withheld 185,469 shares
Abstained 0 Abstained 0
Broker Non-Votes 0 Broker Non-Votes 0
H.T. Richard Schreyer:
For 11,374,362 shares
Withheld 210,921 shares
Abstained 0
Broker Non-Votes 0
AMENDMENT OF RESTATED ARTICLES OF INCORPORATION TO REDUCE SHAREHOLDER VOTE
REQUIRED TO AMEND CERTAIN PROVISIONS OF RESTATED ARTICLES OF INCORPORATION:
For 9,994,109 shares
Against 71,726 shares
Abstained 6,009 shares
Broker Non-Votes 1,513,439 shares
AMENDMENT OF RESTATED ARTICLES OF INCORPORATION TO REDUCE THE SIZE RANGE OF THE
BOARD OF DIRECTORS:
For 11,536,049 shares
Against 37,699 shares
Abstained 11,534 shares
Broker Non-Votes 1 shares
AMENDMENT OF RESTATED ARTICLES OF INCORPORATION TO ELIMINATE THE DESIGNATION OF
SERIES A PREFERRED STOCK:
For 9,958,881 shares
Against 13,841 shares
Abstained 98,912 shares
Broker Non-Votes 1,513,649 shares
20
AMENDMENT AND RE-APPROVAL OF EXECUTIVE ANNUAL INCENTIVE PLAN:
For 11,094,058 shares
Against 472,917 shares
Abstained 18,307 shares
Broker Non-Votes 1 shares
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 7, 2003, with respect to the 2003 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 Company filed or submitted the following reports on Form 8-K during the
second quarter of 2003:
o A Form 8-K dated April 23, 2003, was filed on April 25, 2003, to
report recent developments in a previously reported legal
proceeding.
o A Form 8-K dated May 6, 2003, was submitted on May 6, 2003, to
furnish the Company's earnings release for the quarter ended March
31, 2003.
After the end of the quarter, the Company submitted a Form 8-K dated August 5,
2003, to furnish the Company's earnings release for the quarter ended June 30,
2003.
21
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, 2003
AMERICAN MEDICAL SECURITY GROUP, INC.
/s/ John R. Lombardi
John R. Lombardi
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer and Chief Accounting Officer
and duly authorized to sign on behalf of the Registrant)
22
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, 2003
EXHIBIT DESCRIPTION INCORPORATED HEREIN FILED
NUMBER BY REFERENCE TO HEREWITH
3.1 Amended and Restated Articles of X
Incorporation of Registrant dated as of
May 27, 2003
3.2 Bylaws of Registrant as amended and X
restated May 21, 2003
31.1 Certification of Chief Executive Officer X
Pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act
of 1934, as amended
31.2 Certification of Chief Financial Officer X
Pursuant to Rule 13a-14(a) or Rule
15d-14(a) of the Securities Exchange Act
of 1934, as amended
32 Certification of Chief Executive Officer X
and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act
of 2002
EX-1