10-Q 1 f10q0901.txt 9/30/01 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly Period Ended September 30, 2001 Commission File Number 1-8538 ASCENT ASSURANCE, INC. (Exact name of Registrant as specified in its Charter) DELAWARE 73-1165000 - -------- ---------- (State of Incorporation) (I.R.S. Employer Identification No.) 110 West Seventh Street, Suite 300, Fort Worth, Texas 76102 - ----------------------------------------------------- ----- (Address of Principal Executive Offices) (Zip Code) 817-878-3300 ------------------------------------------------------------------- (Registrant's Telephone Number, including Area Code) N/A - -------------------------------------------------------------------------------- (Former Name, Address and Former Fiscal Year, if changed since Last Report) 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 has filed all reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO Common Stock - Par Value $.01 6,500,000 Shares Outstanding at November 14, 2001 ASCENT ASSURANCE, INC. INDEX TO FORM 10-Q PART 1 - FINANCIAL INFORMATION Page No. - ------------------------------ -------- Item 1 - Financial Statements Ascent Assurance, Inc. Condensed Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 2 Ascent Assurance, Inc. Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2001 and 2000 3 Ascent Assurance, Inc. Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2001 and 2000 4 Ascent Assurance, Inc. Condensed Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2001 and 2000 5 Ascent Assurance, Inc. Consolidated Statement of Changes in Stockholders' Equity for the Nine Months Ended September 30, 2001 6 Notes to Condensed Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations General 11 Operating Results 13 Financial Condition 15 Liquidity, Capital Resources and Statutory Capital and Surplus 18 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 21
ASCENT ASSURANCE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 2001 2000 (Unaudited) (Audited) -------------- --------------- (in thousands, except per share data) Assets Investments: Fixed Maturities: Available-for-sale, at market value (amortized cost $95,269 and $104,081) $ 95,949 $ 100,590 Equity securities, at market (cost $1,432 and $1,365) 1,493 1,335 Other investments 396 398 Short-term investments 15,618 7,254 -------------- --------------- Total Investments 113,456 109,577 Cash 2,057 2,658 Accrued investment income 1,598 1,965 Receivables from agents, net of allowance for doubtful accounts of $4,124 and $3,711 7,934 8,737 Deferred policy acquisition costs 25,820 24,711 Property and equipment, net of accumulated depreciation of $4,033 and $2,683 5,672 6,375 Other assets 6,902 6,455 -------------- --------------- Total Assets $ 163,439 $ 160,478 ============== =============== Liabilities, Preferred Stock and Stockholders' Equity Liabilities: Policy liabilities and accruals: Future policy benefits $ 61,125 $ 61,306 Claim reserves 36,283 42,778 -------------- --------------- Total Policy Liabilities and Accruals 97,408 104,084 Accounts payable and other liabilities 12,216 15,667 Notes payable 19,067 8,947 -------------- --------------- Total Liabilities 128,691 128,698 -------------- --------------- Redeemable Convertible Preferred Stock 29,870 27,705 -------------- --------------- Stockholders' Equity: Common stock ($.01 par value, 30,000,000 shares authorized; 6,500,000 shares issued) 65 65 Capital in excess of par value 27,897 27,620 Accumulated other comprehensive income (loss), net of tax 741 (2,324) Retained deficit (23,825) (21,286) -------------- --------------- Total Stockholders' Equity 4,878 4,075 -------------- --------------- Total Liabilities, Redeemable Convertible Preferred Stock And Stockholders' Equity $ 163,439 $ 160,478 ============== ===============
See the Notes to the Condensed Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ -------------------------------- 2001 2000 2001 2000 ------------ ------------- ------------- -------------- (in thousands, except per share data) Revenues: Premiums: First-year $ 7,176 $ 8,419 $ 23,544 $ 22,358 Renewal 24,496 22,412 72,043 66,706 ------------ ------------- ------------- -------------- Total premiums 31,672 30,831 95,587 89,064 Net investment income 2,186 2,626 6,802 6,970 Fee, service and other income 4,852 5,207 15,822 15,397 Net realized gain (loss) on investments 211 28 306 (209) ------------ ------------- ------------- -------------- Total revenue 38,921 38,692 118,517 111,222 ------------ ------------- ------------- -------------- Benefits, claims and expenses: Benefits and claims 22,392 24,516 71,767 71,160 Decrease (increase) in deferred acquisition costs 1,118 (1,955) (1,109) (5,893) Commissions 5,031 6,512 16,532 18,802 General and administrative expenses 8,310 9,379 28,063 26,148 Taxes, licenses and fees 1,186 1,235 3,539 3,939 Interest expense on notes payable 640 198 1,296 435 ------------ ------------- ------------- -------------- Total expenses 38,677 39,885 120,088 114,591 Income (loss) before income taxes 244 (1,193) (1,571) (3,369) Federal income tax benefit - 406 - 1,146 ------------ ------------- ------------- -------------- Net income (loss) $ 244 $ (787) $ (1,571) $ (2,223) Preferred stock dividends 746 651 2,166 1,953 ------------ ------------- ------------- -------------- Loss applicable to common stockholders $ (502) $ (1,438) $ (3,737) $ (4,176) ============ ============= ============= ============== Basic and diluted loss per common share $ (.08) $ (.22) $ (.57) $ (.64) ============ ============= ============= ============== Weighted average shares outstanding: Basic 6,500 6,500 6,500 6,500 ============ ============= ============= ============== Diluted 6,500 6,500 6,500 6,500 ============ ============= ============= ==============
See the Notes to the Condensed Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ------------------------------- 2001 2000 2001 2000 ------------ ----------- ------------- ------------- (in thousands) Net income (loss) $ 244 $ (787) $ (1,571) $ (2,223) Other comprehensive income (loss): Unrealized holding gain arising during period, net of tax 2,512 997 3,371 321 Reclassification adjustment of (gain) loss on sales of investments included in net income, net of tax (211) (18) (306) 138 ------------ ----------- ------------- ------------- Comprehensive income (loss) $ 2,545 $ 192 $ 1,494 $ (1,764) ============ =========== ============= =============
See the Notes to the Condensed Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- -------------------------------- 2001 2000 2001 2000 ------------ ------------ ------------- -------------- (in thousands) Cash Flow From Operating Activities: Net income (loss) $ 244 $ (787) $ (1,571) $ (2,223) Adjustments to reconcile net income to cash provided by (used for) operating activities Decrease in accrued investment income 250 203 367 210 Decrease (increase) in deferred acquisition costs 1,118 (1,955) (1,109) (5,893) Decrease (increase) in receivables from agents 420 (595) 803 (1,360) Decrease (increase) in other assets 467 994 (447) 165 (Decrease) increase in policy liabilities and accruals (1,836) (1,922) (6,676) 8,056 (Decrease) increase in accounts payable and other liabilities (1,372) 5,856 (3,451) 6,759 Decrease (increase) in deferred income taxes, net - 118 - (831) Other, net 921 (726) 2,820 1,275 ------------ ------------ ------------- -------------- Net Cash Provided By (Used For) Operating Activities 212 1,186 (9,264) 6,158 ------------ ------------ ------------- -------------- Cash Flow From Investing Activities: Purchases of fixed maturity investments (2,941) (10,369) (15,939) (19,375) Sales of fixed maturity investments 6,083 6,433 19,491 10,147 Maturities and calls of fixed maturity investments 2,517 1,285 5,161 3,283 Purchases of equity securities (368) - (368) - Sales of equity securities 301 - 301 - Net (increase) decrease in short term and other investments (3,040) 3,308 (8,362) (603) Property and equipment purchased (168) (326) (648) (1,146) ------------ ------------ ------------- -------------- Net Cash Provided By (Used For) Investing Activities 2,384 331 (364) (7,694) ------------ ------------ ------------- -------------- Cash Flow From Financing Activities: Issuance of notes payable - 974 11,305 2,862 Repayment of notes payable (1,361) (93) (1,811) (373) Deferred debt costs (120) - (467) - ------------ ------------ ------------- -------------- Net Cash (Used For) Provided By Financing Activities (1,481) 881 9,027 2,489 ------------ ------------ ------------- -------------- Increase (Decrease) In Cash During Period 1,115 2,398 (601) 953 Cash At Beginning Of Period 942 3,665 2,658 5,110 ------------ ------------ ------------- -------------- Cash At End Of Period $ 2,057 $ 6,063 $ 2,057 $ 6,063 ============ ============ ============= ==============
See the Notes to the Condensed Consolidated Financial Statements. ASCENT ASSURANCE, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (in thousands, except share data) Accumulated Capital Other Retained Total Common Stock in Excess Comprehensive (Deficit) Stockholders' Shares Amount of Par Value (Loss) Gain Earnings Equity ------ ------ ------------ ----------- -------- ------ Balance at December 31, 2000 6,500,000 $ 65 $ 27,620 $ (2,324) $ (21,286) $ 4,075 Net loss (1,571) (1,571) Preferred Stock dividend (2,166) (2,166) Other comprehensive gain, net of tax 3,065 1,198 4,263 Amortization of unearned compensation 277 277 ------------- ------- ------------ ---------- ---------- ------------ Balance at September 30, 2001 6,500,000 $ 65 $ 27,897 $ 741 $ (23,825) $ 4,878 ============= ======= ============ ========== ========== ============
See the Notes to the Condensed Consolidated Financial Statements. ASCENT ASSURANCE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - DESCRIPTION OF BUSINESS Ascent Assurance, Inc. ("Ascent"), a Delaware company incorporated in 1982, is an insurance holding company engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners. The Company's revenues result primarily from premiums and fees from the insurance products sold by its wholly owned subsidiaries National Foundation Life Insurance Company ("NFL"), Freedom Life Insurance Company of America ("FLICA"), National Financial Insurance Company ("NFIC") and American Insurance Company of Texas ("AICT", and together with NFL, NFIC and FLICA, collectively, the "Insurance Subsidiaries") and marketed by NationalCare(R) Marketing, Inc. ("NCM"), also a wholly owned subsidiary. To a lesser extent the Company derives revenue from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions for prior year sales of unaffiliated insurance products. NOTE 2 - ACCOUNTING PRINCIPLES Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and footnotes required by accounting principles generally accepted in the United States ("GAAP") for complete financial statements. Financial statements prepared in accordance with GAAP require the use of management estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to 2000 amounts in order to conform to the 2001 financial statement presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Future Policy Benefits. Liabilities for future policy benefits not yet incurred are computed primarily using the net level premium method including actuarial assumptions as to investment yield, mortality, morbidity, withdrawals, persistency and other assumptions which were appropriate at the time the policies were issued. Assumptions used are based on the Company's experience as adjusted to provide for possible adverse deviation. Generally, these actuarial assumptions are fixed and, absent material adverse benefit experience, are not adjusted. Claim Reserves. Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company experienced significant changes in its claims payment patterns. During 2001, the Company's claims payment patterns accelerated, which resulted in a significant reduction in pending claims inventory at September 30, 2001 from historical levels. This significant change in the claims payment patterns has increased the inherent uncertainty in estimating claim reserves. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations. Federal Income Taxes. The Company records income taxes based on the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded when such differences arise. A valuation allowance, reducing any recognized deferred tax asset, must be recorded if it is determined that it is more likely than not that such deferred tax asset will not be realized. As of September 30, 2001, the Company has reported cumulative pre-tax losses since March 31, 1999, the date it emerged from Chapter 11 bankruptcy proceedings. Realization of the Company's deferred tax asset is dependent upon the return of the Company's operations to profitability. Pre-tax losses during 2000 and the first nine months of 2001 were principally attributable to adverse claims experience for certain major medical products. Management believes that such product losses can be significantly reduced through aggressive rate increase management. However, projections of future profitability are significantly discounted when evaluating the recoverability of deferred tax assets and do not overcome the negative evidence of cumulative losses under GAAP. Accordingly, the Company has increased its deferred tax asset valuation allowance to fully reserve all net deferred tax assets as of December 31, 2000 and September 30, 2001. Earnings Per Share. Under GAAP there are two measures of earnings per share: "basic earnings per share" and "diluted earnings per share". Basic earnings per share is computed by dividing income applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. Diluted weighted shares exclude all convertible securities for loss periods. The following table reflects the calculation of basic and diluted EPS: Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ---------------------------- 2001 2000 2001 2000 ---------- ------------ ------------ ------------ (amounts in thousands, except per share amounts) Net income (loss) $ 244 $ (787) $ (1,571) $ (2,223) Preferred stock dividends (746) (651) (2,166) (1,953) ---------- ------------ ------------ ------------ Loss applicable to common shareholders $ (502) $ (1,438) $ (3,737) $ (4,176) ========== ============ ============ ============ Weighted average shares outstanding: Basic 6,500 6,500 6,500 6,500 Diluted 6,500 6,500 6,500 6,500 Basic and diluted loss per share $ (.08) $ (.22) $ (.57) $ (.64) ========== ============ ============ ============
NOTE 3 - PREFERRED STOCK Dividends on the Company's preferred stock are payable in cash or through issuance of additional shares of preferred stock, at the Company's option. On September 30, 2001, preferred stock dividends accrued in the third quarter of 2001 were paid through the issuance of 746 shares of preferred stock and a $302 distribution of cash. NOTE 4 - COMMITMENTS AND CONTINGENCIES In the normal course of its business operations, the Company is involved in various claims and other business related disputes. In the opinion of management, the Company is not a party to any pending litigation the disposition of which would have a material adverse effect on the Company's business, financial position or its results of operations. NOTE 5 - IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance, which replaced the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in certain areas. The Insurance Department of the State of Domicile of the Company's Insurance Subsidiaries has adopted the Codification effective January 1, 2001. Codification guidance did not materially impact statutory surplus of the Company's Insurance Subsidiaries. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement (as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities, Deferral of the Effective Date of SFAS No. 133, an amendment of SFAS No. 133") is effective for fiscal years beginning after June 15, 2000. The pronouncement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. As the Company has not participated in derivative or hedging activities, the Company's financial statements are not affected by SFAS 133. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). The Company adopted FIN 44 on a prospective basis effective July 1, 2000. The adoption of FIN 44 did not have a material impact on the Company's results of operations, liquidity or financial position. In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS 141"). This statement supercedes APB Opinion No. 16, "Business Combinations", and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises", and establishes accounting and reporting standards for business combinations. Under the statement, all business combinations in the scope of the statement are to be accounted for using one method, the purchase method. The provisions of the statement apply to all business combinations initiated after June 30, 2001. As the Company has not been a part of any business combinations initiated after the effective date, the Company's financial statements are not affected by SFAS 141. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The statement is effective for fiscal years beginning after December 15, 2001 and will require intangible assets as defined in SFAS No. 141 to be reclassified into goodwill, cessation of the amortization of goodwill and the testing for impairment of goodwill at transition and on an annual basis or more frequently if the occurrence of an event or circumstance indicates an impairment. The Company will adopt SFAS 142 on January 1, 2002. The Company does not expect the adoption of the statement to materially impact the Company's results of operations and financial position. ASCENT ASSURANCE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion provides management's assessment of financial condition at September 30, 2001 as compared to December 31, 2000 and results of operations for the three and nine months ended September 30, 2001 as compared to the comparable 2000 periods for the Company. This discussion updates the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2000 Report on Form 10-K and should be read in conjunction therewith. Business Overview. The Company's revenues result primarily from premiums and fees from the insurance products sold by its wholly owned subsidiaries National Foundation Life Insurance Company ("NFL"), Freedom Life Insurance Company of America ("FLICA"), National Financial Insurance Company ("NFIC") and American Insurance Company of Texas ("AICT", and together with NFL, NFIC and FLICA, collectively, the "Insurance Subsidiaries") and marketed by NationalCare(R) Marketing, Inc. ("NCM"), also a wholly owned subsidiary. To a lesser extent the Company derives revenue from (i) telemarketing services, (ii) printing services, and (iii) renewal commissions for prior year sales of unaffiliated insurance products. The Company's operations are comprised of one segment, Accident and Health insurance. The principal products currently marketed by NCM and underwritten by the Insurance Subsidiaries are medical expense reimbursement policies. These products are designed with flexibility as to benefits, deductibles, coinsurance and premium payments, which can be adapted to meet regional sales or competitive needs, as well as those of the individual policyholders. The principal product groups currently underwritten by the Insurance Subsidiaries are comprehensive major medical products, hospital/surgical major medical products and supplemental specified disease products: o Comprehensive major medical products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of medicines. o Hospital/surgical major medical products are similar to comprehensive major medical products except that benefits are limited to hospital/surgical services (services such as routine well care physician visits and prescription drugs are excluded) and deductibles and coinsurance provisions are generally higher. o Supplemental specified disease products include indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and "event specific" policies, which provide fixed benefits or lump sum payments upon diagnosis of certain types of internal cancer or other catastrophic diseases. Prior to 1998, the Insurance Subsidiaries also underwrote Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. The Insurance Subsidiaries continue to receive premiums on Medicare Supplement policies sold prior to that date. Forward-Looking Statements. Statements contained in this analysis and elsewhere in this document that are not based on historical information are forward-looking statements and are based on management's projections, estimates and assumptions. Management cautions readers regarding its forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Various statements contained in the Management's Discussion and Analysis of Results of Operation and Financial Condition, are forward-looking statements. These forward-looking statements are based on the intent, belief or current expectations of the Company and members of its senior management team. While the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Important factors known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report include, but are not limited to: o further adverse claims experience in excess of management's current expectations or other events adversely impacting the Company's liquidity position, o actions that may be taken by insurance regulatory authorities, o adverse developments in the timing or results of the Company's current strategic business plan to return operations to profitability by improving claims experience and reducing overhead expenses, o the loss of key personnel, o and the effect of changing economic and market conditions, especially medical expense inflation and health care reform initiatives. Subsequent written or oral statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Report and those in the Company's reports previously filed with the SEC. Copies of these filings may be obtained by contacting the Company or the SEC. OPERATING RESULTS Results of operations for Ascent are reported for the three and nine months ended September 30, 2001 and 2000. (In thousands except insurance operating ratios.) Three Months Ended Nine Months Ended September 30, September 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------- Premiums $ 31,672 $ 30,831 $ 95,587 $ 89,064 Other 788 960 2,659 2,455 ------------ ------------ ------------ ------------- Total insurance operating revenue 32,460 31,791 98,246 91,519 ------------ ------------ ------------ ------------- Benefits and claims 22,392 24,516 71,767 71,160 Commissions 4,219 4,965 13,770 13,823 Decrease (increase) in deferred acquisition costs 1,118 (1,955) (1,109) (5,893) General and administrative expense 5,529 7,542 19,434 20,756 Taxes, licenses and fees 1,076 988 3,119 3,448 ------------ ------------ ------------ ------------- Total insurance operating expenses 34,334 36,056 106,981 103,294 ------------ ------------ ------------ ------------- Insurance Operating Results (1,874) (4,265) (8,735) (11,775) ------------ ------------ ------------ ------------- Fee and service income 4,064 4,247 13,163 12,942 Fee and service expenses (3,703) (3,631) (11,811) (10,862) ------------ ------------ ------------ ------------- Fee and Service Results 361 616 1,352 2,080 ------------ ------------ ------------ ------------- Net investment income 2,186 2,626 6,802 6,970 Net realized gain on investments 211 28 306 (209) Interest expense on notes payable (640) (198) (1,296) (435) ------------ ------------ ------------ ------------- Income (loss) Before Income Taxes 244 (1,193) (1,571) (3,369) Income tax benefit - 406 - 1,146 ------------ ------------ ------------ ------------- Net Income (Loss) $ 244 $ (787) $ (1,571) $ (2,223) ============ ============ ============ ============= Insurance operating ratios* Benefits and claims 70.7% 79.5% 75.1% 79.9% Commissions 13.3% 16.1% 14.4% 15.5% Decrease (increase) in deferred acquisition costs 3.5% (6.3)% (1.2)% (6.6)% General and administrative expenses 17.0% 23.7% 19.8% 22.7% Taxes, licenses and fees 3.4% 3.2% 3.3% 3.9%
*Ratios are calculated as a percent of premium with the exception of the general and administrative expense ratio which is calculated as a percent of total insurance operating revenue. Overview. For the third quarter of 2001, income before income taxes was $244,000 compared to a loss before income taxes of $1.2 million for the corresponding 2000 period. The $1.4 million improvement in pre-tax income resulted principally from a decrease in losses from the Group Preferred Provider Organization ("GPPO") product, the principal major medical product marketed by FLICA from 1998 to July 2000, due to rate increases implemented during 2001 for this product. In addition, general and administrative expenses for the third quarter of 2000 included $650,000 of non-recurring expenses related to the implementation in May 2000, of the Company's new policy administration and data processing systems. The Company's insurance operations were not materially impacted by the terrorist attacks of September 11, 2001. However, the Company's telemarketing and printing subsidiaries experienced a decline in demand for their products and services that is expected to be temporary. For the first nine months of 2001, the pre-tax loss was $1.6 million, compared to a pre-tax loss of $3.4 million for the nine months ended September 30, 2000. Pre-tax operating losses for both year-to-date 2001 and 2000 were principally attributable to losses from the GPPO product that resulted from higher than expected claims frequency. Consequently, FLICA has required significant capital contributions during 2001 and 2000 to comply with statutory capital and surplus requirements. Adverse claims experience for the GPPO product in excess of management's current expectations would have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements and maintain its new business production at current levels (see "Liquidity, Capital Resources and Statutory Capital and Surplus"). Since July 2000, the Company has been successfully marketing a new major medical policy in all significant marketing regions. This new product was designed to produce a substantially lower benefits and claims to premium ratio than the old GPPO product. At September 30, 2001, the new major medical product comprised 45% of in force major medical products as compared to 14% at December 31, 2000. The Company's ability to continue marketing its new major medical product is dependent upon the financing of commission advances made to agents for new business production (see "Liquidity, Capital Resources and Statutory Capital and Surplus"). The following narratives discuss the principal components of insurance operating results. Premiums. Premium revenue, in thousands, for each major product line is set forth below: Three Months Ended Nine Months Ended September 30, September 30, -------------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ------------- ------------- ------------- Major medical: First-year $ 6,683 $ 7,158 $ 22,059 $ 20,005 Renewal 13,394 10,301 37,377 27,609 ------------- ------------- ------------- ------------- Subtotal 20,077 17,459 59,436 47,614 ------------- ------------- ------------- ------------- Supplemental specified disease: First-year 271 325 855 1,051 Renewal 5,794 6,573 17,837 19,867 ------------- ------------- ------------- ------------- Subtotal 6,065 6,898 18,692 20,918 ------------- ------------- ------------- ------------- Medicare supplement: First-year - - - - Renewal 4,945 5,330 15,536 18,404 ------------- ------------- ------------- ------------- Subtotal 4,945 5,330 15,536 18,404 ------------- ------------- ------------- ------------- Other 585 1,144 1,923 2,128 ------------- ------------- ------------- ------------- Consolidated Premium Revenue $ 31,672 $ 30,831 $ 95,587 $ 89,064 ============= ============= ============= =============
Total premiums increased by $841,000, or 3%, for the third quarter of 2001 and $6.5 million, or 7%, for the nine months of 2001 as compared to the corresponding 2000 periods. Premium revenue increased as new business production and rate increases for the GPPO and other products offset the expected decline in renewal premiums from lapsation of in force business. As the Company is principally marketing major medical products, the percentage of major medical premiums to total premiums increased to 63% for the third quarter of 2001 from 56% for the corresponding prior period. Premiums from the GPPO major medical product, for which marketing was discontinued in July 2000, were $8.8 million and $29.1 million for the three and nine months ended September 30, 2001 compared to $11.1 million and $26.3 million for the corresponding 2000 periods. Premiums for the new major medical product, which the Company began marketing in July 2000, were $5.6 million and $13.0 million for the three and nine months ended September 30, 2001. Benefits and Claims. Benefits and claims are comprised of (1) claims paid, (2) changes in the claim reserves for claims incurred (whether or not reported), and (3) changes in future policy benefit reserves. The ratio of benefits and claims to premiums decreased by 8.8% for the third quarter of 2001 compared to the third quarter of 2000 due primarily to declining losses from the GPPO product attributable to lower overall premium volume and a lower loss ratio resulting from premium rate increases. Despite the improvement for the third quarter 2001, incurred benefit and claims experience for the GPPO major medical product remains significantly higher than pricing assumptions due to higher than expected claims frequency. Additional adverse claims experience for the old GPPO product in excess of management's current expectations could have a material adverse impact on FLICA's ability to meet minimum statutory capital and surplus requirements (See "Liquidity, Capital, Resources and Statutory Capital and Surplus"). Interest Expense. Interest expense increased $442,000 and $861,000, respectively, for the three and nine months ended September 30, 2001 compared to the comparable 2000 periods due to the $11 million debt financing from Credit Suisse First Boston Management Corporation obtained in April, 2001. For the three months and nine months ended September 30, 2001, the interest expense related to the $11 million financing was $514,000 and $813,000, respectively, including $349,000 and $627,000 of interest paid in kind by issuance of additional notes. FINANCIAL CONDITION Investments. The following table summarizes the Company's fixed maturity securities, excluding short-term investments and certificates of deposit. All of the Company's fixed maturity securities are classified as available-for-sale and are carried at estimated market value. Estimated market value represents the closing sales prices of marketable securities. Investments in the debt securities of corporations are principally in publicly traded bonds. September 30, 2001 December 31, 2000 --------------------------- ----------------------------- Market Market Fixed Maturity Securities Value % Value % - ----------------------------------------- -------------- ----------- -------------- ----------- (in thousands) (in thousands) U.S. Government and governmental agencies and authorities (except mortgage-backed) $ 10,872 11.3 $ 10,462 10.4 Finance 21,299 22.2 23,445 23.3 Public utilities 7,629 8.0 6,787 6.7 Mortgage-backed 11,787 12.3 13,302 13.2 States, municipalities and political subdivisions 2,057 2.1 1,982 2.0 All other corporate bonds 42,305 44.1 44,612 44.4 ------------ ----------- ------------- ------------ Total fixed maturity securities $ 95,949 100.0 $ 100,590 100.0 ============ =========== ============= ============
The following table indicates by rating the composition of the Company's fixed maturity securities portfolio, excluding short-term investments and certificates of deposit. Ratings are the lower of those assigned by Standard & Poor's and Moody's, when available, and are shown in the table using the Standard & Poor's rating scale. Unrated securities are assigned ratings based on the applicable NAIC's designation or the rating assigned to comparable debt outstanding of the same issuer. NAIC 1 fixed maturity securities have been classified as "A" (and above) and NAIC 2 fixed maturity securities have been classified as "BBB". September 30, 2001 December 31, 2000 ------------------------------ ------------------------------ Composition of Fixed Maturity Market Market Securities by Rating Value % Value % - ---------------------------------------- -------------- -------------- -------------- -------------- (in thousands) (in thousands) Ratings - ------- Investment grade: U.S. Government and agencies $ 21,624 22.5 $ 22,754 22.6 AAA 2,862 3.0 2,885 2.9 AA 7,960 8.3 8,305 8.3 A 34,727 36.2 38,552 38.3 BBB 28,054 29.2 27,168 27.0 Non-Investment grade: BB - - 674 0.7 B and below 722 0.8 252 0.2 ------------ ------------- ------------ ------------- Total fixed maturity securities $ 95,949 100.0 $ 100,590 100.0 ============ ============= ============ =============
The scheduled contractual maturities of the Company's fixed maturity securities, excluding short-term investments and certificates of deposit, at September 30, 2001 and December 31, 2000 are shown in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. September 30, 2001 December 31, 2000 -------------------------------- ------------------------------- Composition of Fixed Maturity Market Market Securities by Maturity Value % Value % - ------------------------------------------- --------------- -------------- -------------- --------------- (in thousands) (in thousands) Scheduled Maturity Due in one year or less $ 7,913 8.2 $ 7,073 7.0 Due after one year through five years 25,962 27.1 28,877 28.7 Due after five years through ten years 26,470 27.6 26,327 26.2 Due after ten years 23,817 24.8 25,011 24.9 Mortgage-backed and asset-backed securities 11,787 12.3 13,302 13.2 ------------- -------------- ------------- --------------- Total fixed maturity securities $ 95,949 100.0 $ 100,590 100.0 ============= ============== ============= ===============
Claim Reserves. Claim reserves are established by the Company for benefit payments which have already been incurred by the policyholder but which have not been paid by the Company. Claim reserves totaled $36.3 million at September 30, 2001 as compared to $42.8 million at December 31, 2000. The process of estimating claim reserves involves the active participation of experienced actuarial consultants with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Examples of such changes include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) changes in production sources for existing lines of business; (4) writings of significant blocks of new business and (5) significant changes in claims payment patterns. As a result of the implementation of a new claims administration system in May 2000, the Company experienced significant changes in its claims payment patterns. During 2001, the Company's claims payment patterns accelerated, which resulted in a significant reduction in pending claims inventory at September 30, 2001 from historical levels. This significant change in the claims payment patterns has increased the inherent uncertainty in estimating claim reserves. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations. Management considers many factors when setting reserves including: (1) historical trends; (2) current legal interpretations of coverage and liability; (3) loss payments and pending levels of unpaid claims; and (4) product mix. Based on these considerations, management believes that adequate provision has been made for the Company's claim reserves. Actual claims paid may deviate, perhaps substantially, from such reserves. Future Policy Benefit Reserves. Future policy benefit reserves are established by the Company for benefit payments that have not been incurred but which are estimated to be incurred in the future. Future policy benefit reserves totaled $61.1 million at September 30, 2001 as compared to $61.3 million at December 31, 2000. Future policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the Company's expected future policyholder benefits minus the discounted present value of its expected future net premiums. These present value determinations are based upon assumed fixed investment yields, the age of the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. Except for purposes of reporting to insurance regulatory authorities and for tax filing, the Company's claim reserves and policy benefit reserves are determined in accordance with GAAP. In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Company's future policy benefit reserves, the Company relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. The Company's persistency rates have a direct impact upon its policy benefit reserves because the determinations for this reserve are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly. The Company's policy benefit reserve requirements are also interrelated with product pricing and profitability. The Company must price its products at a level sufficient to fund its policyholders benefits and still remain profitable. Because the Company's claim and policyholder benefits represent the single largest category of its operating expenses, inaccuracies in the assumptions used to estimate the amount of such benefits can result in the Company failing to price its products appropriately and to generate sufficient premiums to fund the payment thereof. The increases in claim ratios experienced by the Company during 2000 and into 2001 were indicative of inadequate pricing in the Company's principal major medical product marketed through June 2000. In accordance with GAAP, the Company's actuarial assumptions are generally fixed, and absent materially adverse benefit experience, they are not generally adjusted. The Company monitors the adequacy of its policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of the Company's policy benefit reserves may also be impacted by the development of new medicines and treatment procedures which may alter the incidence rates of illness and the treatment methods for illness and accident (such as out-patient versus in-patient care) or prolong life expectancy. Changes in coverage provided by major medical insurers or government plans may also affect the adequacy of the Company's reserves if, for example, such developments had the effect of increasing or decreasing the incidence rate and per claim costs of occurrences against which the Company insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the Company needing to post additional reserves, which could have a material adverse effect upon its business, financial condition or results of operations. LIQUIDITY, CAPITAL RESOURCES AND STATUTORY CAPITAL AND SURPLUS Ascent. Ascent's principal assets consist of the capital stock of its subsidiaries and invested assets. Accordingly, Ascent's sources of funds are primarily comprised of dividends and advances from non-insurance subsidiaries. The Company's principal uses of cash are for capital contributions to its Insurance Subsidiaries and general and administrative expenses. The Company funded capital contributions to its Insurance Subsidiaries of $18.2 million during the nine months ended September 30, 2001 as compared to $4.8 million for the corresponding prior year period. As of September 30, 2001, Ascent held approximately $889,000 in unrestricted cash and invested assets. During the first quarter 2001, the Company determined that continued adverse claims experience for the old GPPO product would require Ascent to make capital contributions to FLICA in excess of those originally planned. Ascent obtained financing (see below) and contributed an additional $11 million to FLICA in April 2001 to enable FLICA to comply with minimum statutory capital and surplus requirements promulgated by the states of Texas and Florida. If the adverse claims experience for the old GPPO product exceeds management's current estimates, Ascent would be required to make additional capital contributions to FLICA in excess of those currently projected for 2001. Additional financing would be required by Ascent in order to make any such "excess" contributions. As a result, adverse claims experience for the old GPPO product or other products written by the Insurance Subsidiaries in excess of management's current estimates could have a material adverse effect on Ascent's liquidity and capital resources and, due to potential restrictions on the ability of FLICA to underwrite new policies, its results of operations. Ascent received debt financing for the $11 million capital contribution described above from a loan made by Credit Suisse First Boston Management Corporation, which is an affiliate of Special Situations Holdings, Inc. -- Westbridge (Ascent's largest stockholder). The credit agreement relating to that loan provided Ascent with total loan commitments of $11 million (all of which has been drawn). The loan bears interest at a rate of 12% per annum and matures in April, 2004. Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During the third quarter of 2001, Ascent issued $349,000 in additional notes for payment of interest in kind. The credit agreement relating to the loan provides for a facility fee of $1.5 million which is payable upon maturity or upon a change in control, as defined. Ascent's obligations are secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of Ascent and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, Ascent Funding, Inc. and Ascent Management, Inc., some or all of which is pledged as collateral for receivables financing described below). Ascent's subsidiaries (other than those listed above) have also guaranteed Ascent's obligations under the credit agreement and the loan. Adverse claims experience for the old GPPO product in excess of management's current estimates could result in events of default under the credit agreement and related agreements. Dividends on Ascent's Redeemable Convertible Preferred Stock ("Preferred Stock") may be paid in cash or by issuance of additional shares of Preferred Stock, at the Company's option. On September 30, 2001, preferred stock dividends accrued in the third quarter of 2001 were paid through the issuance of 746 shares of preferred stock and a $303 distribution of cash. Insurance Subsidiaries. The primary sources of cash for the Insurance Subsidiaries are premiums, sales and maturities of invested assets and investment income while the primary uses of cash are benefits and claims, commissions, general and administrative expenses, and taxes, licenses and fees. Cash contributions of $18.2 million were funded during the nine months ended September 30, 2001, by Ascent to its Insurance Subsidiaries to maintain capital and surplus (see "Ascent" discussion above). The Company's Insurance Subsidiaries recorded combined statutory losses of $13.0 million for the first nine months of 2001 and $17.0 million for the twelve months ended December 31, 2000. The statutory losses resulted from 1) higher than expected claims and benefits for the old GPPO major medical product (see "Operating Results") and 2) costs associated with increased new business production which must be expensed under statutory accounting (for GAAP, such costs are deferred and amortized as related premiums are recorded). Dividends paid by the Company's Insurance Subsidiaries are determined by and subject to the regulations of the insurance laws and practices of the insurance department of the state of domicile. The Insurance Subsidiaries are precluded from paying dividends during 2001 without the prior approval of the Texas Insurance Commissioner as the Companies' earned surplus is negative. Inflation will affect claim costs on the Company's Medicare supplement and major medical products. Costs associated with a hospital stay and the amounts reimbursed by the Medicare program are each determined, in part, based on the rate of inflation. If hospital and other medical costs that are reimbursed by the Medicare program increase, claim costs on the Medicare supplement products will increase. Similarly, as the hospital and other medical costs increase, claim costs on the major medical products will increase. The Company has somewhat mitigated its exposure to inflation by incorporating certain limitations on the maximum benefits which may be paid under some of its policies and by filing for premium rate increases as necessary. Consolidated. The Company's consolidated net cash provided by operations totaled $212,000 and $1.2 million for the third quarter of 2001 and 2000, respectively. The decrease in cash flow from operations for 2001 was primarily attributable to an increase in the cash basis ratio of benefits and claims to premiums. Net cash provided by investing activities for the third quarter of 2001 and 2000 totaled $2.4 million and $331,000, respectively. Cash provided by investing activities was primarily from the sale of fixed maturity investments. Net cash (used for) provided by financing activities totaled $(1.5) million and $881,000 for the third quarter of 2001 and 2000, respectively. Financing activities during the third quarter of 2001 include $1.2 million in repayments related to the Company's Receivables Financing Program (defined below) and $140,000 in repayments related to the term loan facility. Financing activities for the corresponding period in 2000 included $1.0 million of borrowings related to the Company's Receivables Financing Program and $140,000 of repayments under the term loan facility. In the ordinary course of business, the Company advances commissions on policies written by its general agencies and their agents. The Company is reimbursed for these advances from the commissions earned over the respective policy's life. The Company finances the majority of its obligations to make commission advances through Ascent Funding, Inc. ("AFI"), an indirect wholly owned subsidiary of Ascent. AFI has entered into a Credit Agreement (the "LaSalle Credit Agreement") with LaSalle Bank, N.A. ("LaSalle"). The LaSalle Credit Agreement, as amended, provides AFI with a $7.5 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from affiliates. At September 30, 2001, approximately $5.1 million was outstanding under the LaSalle Credit Agreement. The LaSalle Credit Agreement expires June 5, 2002, at which time the outstanding principal and interest will be due and payable. Under the terms of the LaSalle Credit Agreement, agent advances made within six months of the expiration date (after December 5, 2001) are not eligible for financing. The Company has received a commitment from LaSalle for a six month renewal of the LaSalle Credit Agreement until December 5, 2002. The Company expects to execute definitive documentation for that renewal by November 30, 2001. Failure of the Company to finanlize the current renewal or obtain additional renewals of the LaSalle Credit Agreement beyond December 2002 could have a material adverse effect on Ascent's liquidity and capital resources and its ability to pay agent commission advances required for new business production. Failure by Ascent to maintain new business production at current levels could have a material adverse effect on Ascent's results of operations. AFI's obligations under the LaSalle Credit Agreement are secured by liens upon substantially all of AFI's assets. The Company has guaranteed AFI's obligations under the LaSalle Credit Agreement, and has pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, FLICA and NFIC as collateral for that guaranty (the "Guaranty Agreement"). As of November 14, 2001, there were no events of default under the LaSalle Credit or Guaranty Agreements. However, additional adverse claims experience in excess of management's current expectations for the old GPPO major medical product could result in events of default under the Guaranty Agreement, Credit Agreement and term loan facility discussed below. In July 1999, Ascent Management, Inc. ("AMI") entered into a $3.3 million term loan facility with LaSalle, proceeds of which were used to fund system replacement costs. The term loan facility is secured by substantially all of AMI's assets and the Guaranty Agreement. Under the terms of the loan, principal is payable in 60 equal monthly installments beginning January 31, 2000. At September 30, 2001, approximately $2.4 million was outstanding under the term loan facility. ASCENT ASSURANCE, INC. PART II ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed herewith. Exhibits incorporated by reference are indicated in the parentheses following the description. 3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 24, 1999 (incorporated by reference to Exhibit 3.1 to the Company's Form 8-A filed on March 25, 1999). 3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999 (incorporated by reference to Exhibit 3.2 to the Company's Form 8-A filed on March 25, 1999). 3.3 Amendment to the By-Laws of the Company, effective as of April 5, 2000 (incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company's Form 8-A filed on March 25, 1999). 4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement (incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed on March 25, 1999). 4.3 Form of Warrant Agreement dated as of March 24, 1999, between the Company and LaSalle National Bank, as warrant agent (incorporated by reference to Exhibit 4.3 to the Company's Form 8-A filed on March 25, 1999). 4.4 Form of Preferred Stock Certificate (incorporated by reference to Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.1 First Amendment to Guaranty Agreement dated as of March 24, 1999 between Westbridge Capital Corp. in favor of LaSalle National Bank (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.2 Registration Rights Agreement dated as of March 24, 1999 between the Company and Special Situations Holdings, Inc. - Westbridge (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.3 1999 Stock Option Plan dated as of March 24, 1999 (incorporated by reference to the Company's Schedule 14A filed with the Commission on April 30, 1999) 10.4 Installment Note Agreement dated July 20, 1999 between Ascent Management, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.5 Second Amendment to Credit Agreement dated August 12, 1999 between Ascent Funding, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.6 Second Amendment to Guaranty Agreement dated July 20, 1999 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). 10.7 Third Amendment to Guaranty Agreement dated April 17, 2000 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.8 Extension of Employment Agreement, dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.9 Extension of Employment Agreement, dated as of September 15, 1998, by and among the Company, Westbridge Management Corp. and Mr. Patrick H. O'Neill (incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 10.10 Fourth Amendment to Guaranty Agreement dated August 10, 2000 between Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.11 First Amendment to Pledge Agreement, dated as of November 30, 2000, by and among Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.12 Fifth Amendment to Guaranty Agreement, dated as of November 30, 2000, by and among Ascent Assurance, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.13 Third Amendment to Credit Agreement, dated as of November 30, 2000, by and among Ascent Funding, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.14 First Amendment to Security Agreement, dated as of November 30, 2000, by and among Ascent Management, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.15 Credit Agreement dated April 17, 2001 between Ascent Assurance, Inc. and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed April 25, 2001). 10.16 Guaranty and Security Agreement dated April 17, 2001 among Foundation Financial Services, Inc., NationalCare(R)Marketing, Inc., LifeStyles marketing Group, Inc., Precision Dialing Service, Inc., Senior Benefits, L.L.C., and Westbridge Printing Services, Inc. and Credit Suisse First Boston management Corporation (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed April 25, 2001). 10.17 Pledge Agreement dated April 17, 2001 between Ascent Assurance, Inc. and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.3 to the Company's Form 8-K filed April 25, 2001). 10.18 Sixth Amendment to Guaranty Agreement and Waiver dated April 17, 2001 between Ascent Assurance Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.4 to the Company's Form 8-K filed April 25, 2001). 10.19 Fourth Amendment to Credit Agreement dated April 17, 2001 between Ascent Funding, Inc. and LaSalle Bank National Association (incorporated by reference to Exhibit 10.5 to the Company's Form 8-K filed April 25, 2001). (b) Reports on Form 8-K No Reports on Form 8-K were filed during the quarter ended September 30, 2001. Form 10-Q 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. ASCENT ASSURANCE, INC. /s/ Cynthia B. Koenig ------------------------------------ Cynthia B. Koenig Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated at Fort Worth, Texas November 14, 2001