SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NUMBER 1
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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 1-8538
USHEALTH GROUP, INC.
(Formerly, Ascent Assurance, Inc.)
(Exact Name of Registrant as Specified in its Charter)

	DELAWARE		73-1165000
	(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
	3100 Burnett Plaza, Unit 33, 801 Cherry Street, Fort Worth, Texas		76102
	(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code:
(817) 878-3300
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (par value $.01)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive Proxy Statement or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes No X

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes No X

The aggregate market value of voting stock held by non-affiliates of the Registrant amounted to $1,698,250 as of March 4, 2005. As of March 4, 2005, 50,606,876 shares of Common Stock were outstanding.

EXPLANATORY NOTE

This Amendment to Form 10-K is filed for the purpose of amending “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the registrant’s Annual Report on Form 10-K filed on March 9, 2005. This Amendment to Form 10-K does not otherwise change or update the disclosures set forth in the Form 10-K as originally filed and does not otherwise reflect events occurring after the filing of the Form 10-K. For a description of the registrant’s business and the risks related to the registrant’s business, see the Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Business Overview. USHEALTH Group, Inc. (“USHEALTH” or the “Company”), formerly Ascent Assurance, Inc., is the successor to a Delaware company incorporated in 1982 as an insurance holding company. USHEALTH, through its applicable subsidiaries, is principally engaged in the development, marketing, underwriting, and administration of medical expense and supplemental health insurance products. 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^®Marketing, Inc. (“NCM”) and AmeriCare Benefits, Inc. (“ACB”), also wholly-owned subsidiaries. The Company, through applicable subsidiaries, also derives fee and service revenue from (i) tele-marketing services, (ii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iii) commissions on the sale of the benefits of unaffiliated membership benefit programs. See Item 1 – “Business” for a discussion of the Company’s marketing distribution system, health insurance products, and market competition.

The following discussion provides management’s assessment of operating results and material changes in financial position and liquidity for the Company. This discussion is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. Certain reclassifications of prior years’ amounts have been made to conform with the 2004 presentation.

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. In particular, forward-looking statements can be identified by the use of words such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, or similar words. 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 Item 1 – “Business” and Item 7 – “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 USHEALTH’s management 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:

•

any limitation imposed on the Insurance Subsidiaries’ ability to control the impact of rising health care costs and rising medical service utilization rates through product and benefit design, underwriting criteria, premium rate increases, utilization management and negotiation of favorable provider contracts;

•

the impact of changing health care trends on the Insurance Subsidiaries’ ability to accurately estimate claim and settlement expense reserves;

•

the ability of the Company to fund competitive commission advances to its agents from internally generated cash flow or external financing;

•

developments in health care reform and other regulatory issues, including the Health Insurance Portability and Accountability Act of 1996 and increased privacy regulation, and changes in laws and regulations in key states where the Company operates;

•

USHEALTH’s ability to make additional investment in its Insurance Subsidiaries in the form of capital contributions, if needed, in order for such subsidiary to comply with regulatory capital or debt covenant requirements;

•

default by issuers of fixed maturity investments owned by the Insurance Subsidiaries; and

•

the loss of key management personnel.

Subsequent written or oral statements attributable to USHEALTH 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 Securities and Exchange Commission (“SEC”). Copies of these filings may be obtained by each stockholder, without charge, by contacting USHEALTH. Requests should be directed to Patrick H. O’Neill, Executive Vice President and General Counsel, USHEALTH Group, Inc., 3100 Burnett Plaza, 801 Cherry Street, Unit 33, Forth Worth, Texas 76102. Such report will be furnished without Exhibits. Copies of the Exhibits will be furnished to requesting stockholders upon payment of the Company’s reasonable expenses in furnishing the same.

CRITICAL ACCOUNTING POLICIES

The Company’s accounting policies are more fully described in Note 2 of the Consolidated Financial Statements at Item 8. The Company believes that the following discussion addresses the Company’s most significant accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments. The Company’s significant accounting policies relate to revenue recognition, investments, agent receivables, deferred policy acquisition costs, deferred tax assets, claim reserves, future policy benefit reserves, reinsurance and statutory accounting practices. The application of these accounting policies requires management to make significant estimates and judgments that affect the reported amounts of assets, liabilities and expenses in the Company’s consolidated financial statements. Such estimates and judgments are based on historical experience, changes in laws and regulations, observance of industry trends, and various information received from third parties. While the estimates and judgments associated with the application of these accounting policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported consolidated financial statement amounts are appropriate in the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions.

Revenue Recognition. Premium revenues from insurance contracts are recognized when due from policyholders. Policies for which premium has not been received within the applicable grace period from the due date are canceled. Fee and service income is recognized when earned, the services have been provided and collectibility is reasonably assured.

Investments. Investment income is an important source of revenue, and the Company’s return on invested assets has a material effect on net income. The Company’s investment policy is subject to the requirements of insurance regulatory authorities. In addition, certain assets are held on deposit in specified states and invested in specified securities in order to comply with state law. Although the Company closely monitors its investment portfolio, available yields on newly invested funds and gains or losses on existing investments depend primarily on general market conditions. The Company’s investment portfolio is managed by Frost National Bank.

Investment policy is determined by the applicable Board of Directors of the Company and each of the Insurance Subsidiaries. The Company’s current investment policy is to balance its portfolio between long-term and short-term investments so as to achieve long-term returns consistent with the preservation of capital and maintenance of adequate liquidity to meet the payment of the Company’s policy benefits and claims. The current schedule of the Company’s invested asset maturities corresponds with the Company’s expectations regarding anticipated cash flow payments based on the Company’s policy benefit and claim cycle, which the Company believes is medium term in nature. The Company invests primarily in fixed-income securities of the U.S. Government and its related agencies, investment grade fixed-income corporate securities and mortgage-backed securities. The Company’s entire fixed maturity portfolio is classified as “available for sale” and carried at market value.

The following table provides information on the Company’s fixed maturity investments, in thousands, as of December 31:


	2004				2003

	Market Value		%		Market Value		%

Fixed Maturities (at market value):
U.S. Government and related agencies	$	10,912		10.9	$	10,887		11.2
State, county and municipal		2,309		2.3		2,297		2.4
Finance companies		23,083		23.1		19,209		19.8
Public utilities		10,123		10.2		8,645		8.9
Mortgage-backed securities		20,420		20.5		23,567		24.3
All other corporate bonds		32,882		33.0		32,363		33.4

Total Fixed Maturities	$	99,729		100.0	$	96,968		100.0

Mortgage-backed securities comprised 20.5% of the Company’s fixed maturity portfolio at December 31, 2004 as compared to 24.3% at December 31, 2003. Mortgage-backed securities are subject to risks associated with variable pre-payments. This may result in these securities having a different actual cash flow and maturity than expected at the time of purchase. Securities that have an amortized cost greater than par and are backed by mortgages that prepay faster than expected will incur a reduction in yield or a loss. Those securities with an amortized cost lower than par that prepay faster than expected will generate an increase in yield or a gain. In addition, the Company may incur reinvestment risks if market yields are lower than the book yields earned on the securities. Prepayments occurring slower than expected have the opposite impact. The Company may incur disinvestment risks if market yields are higher than the book yields earned on the securities and the Company is forced to sell the securities. The degree to which a security is susceptible to either gains or losses is influenced by 1) the difference between its amortized cost and par, 2) the relative sensitivity of the underlying mortgages backing the assets to prepayment in a changing interest rate environment and 3) the repayment priority of the securities in the overall securitization structure. There are negligible default risks in the mortgage-backed securities portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status.

The scheduled contractual maturities of the Company’s fixed maturity securities, excluding short-term investments at December 31 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.


	2004				2003

	Market Value		%		Market Value		%

	(in thousands)				(in thousands)
Scheduled Maturity
Due in one year or less	$	2,003		2.0	$	3,868		4.0
Due after one year through five years		29,122		29.2		23,688		24.4
Due after five years through ten years		33,540		33.6		28,844		29.8
Due after ten years		14,644		14.7		17,001		17.5
Mortgage-backed securities		20,420		20.5		23,567		24.3

Total fixed maturity securities	$	99,729		100.0	$	96,968		100.0

The following table summarizes consolidated investment results (excluding unrealized gains or losses) for the indicated year (in thousands, except percentages):


	2004		2003		2002

Net investment income⁽¹⁾	$	5,047	$	5,135	$	6,238
Net realized gain (loss) on investments		141		238		(88	)
Average gross annual yield on fixed maturities		5.2%		5.3%		6.6%

(1)	Excludes interest on receivables from agents of $0.4 million, $1.0 million, and $1.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company’s portfolio has an average effective duration of five years, which reflects the medium-term nature of its liabilities. As a result, a significant portion of the portfolio matures and is reinvested each year.

The following table indicates by rating the composition of the Company’s fixed maturity securities portfolio, excluding short-term investments at December 31:


	2004				2003

	Market Value		%		Market Value		%

	(in thousands)				(in thousands)
Ratings⁽¹⁾
Investment grade:
U.S. Government and agencies	$	19,892		19.9	$	20,147		20.8
AAA		12,384		12.4		16,514		17.0
AA		4,069		4.1		1,648		1.7
A		32,545		32.6		33,082		34.1
BBB		28,505		28.6		23,438		24.2
Non-Investment grade:
BB		1,785		1.8		1,640		1.7
B and below		549		0.6		499		0.5

Total fixed maturity securities	$	99,729		100.0	$	96,968		100.0

(1)

Ratings are the lower of those assigned primarily 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 designation or the rating assigned to comparable debt outstanding of the same issuer. The Company had no unrated securities at December 31, 2004. NAIC 1 fixed maturity securities have been classified as “A” and NAIC 2 fixed maturity securities have been classified as “BBB”.

The NAIC assigns securities quality ratings and uniform prices called “NAIC Designations” based upon the rating agencies’ ratings, which are used by insurers when preparing their annual statutory reports. The NAIC assigns designations to publicly-traded as well as privately-placed securities. The ratings assigned by the NAIC range from Class 1 (highest quality rating) to Class 6 (lowest quality rating). At December 31, 2004, 66.6%, 31.1% and 2.3% of the market value of the Company’s fixed maturity securities were rated NAIC 1, NAIC 2, and NAIC 3 and below, respectively.

The Company’s fixed maturity securities consist predominately of public traded securities. All “private placement” fixed maturity securities held were securities issued in the Rule 144A market and comprise less than 2% of the Company’s fixed maturity securities portfolio.

The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities at December 31, 2004 were as follows (in thousands):


	Less Than 12 Months					12 Months or More					Total

	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses

Fixed maturity securities:
U.S. Government and agencies	$	1,316	$	(16	)	$	-	$	-		$	1,316	$	(16	)
State, county and municipal		50		(1	)		992		(65	)		1,042		(66	)
Finance companies		4,307		(51	)		1,745		(79	)		6,052		(130	)
Public utilities		5,052		(45	)		1,452		(74	)		6,504		(119	)
Mortgage-backed securities		5,898		(87	)		7,450		(226	)		13,348		(313	)
All other corporate bonds ⁽¹⁾		7,129		(61	)		2,258		(74	)		9,387		(135	)


Total fixed maturity securities	$	23,752	$	(261	)	$	13,897	$	(518	)	$	37,649	$	(779	)

(1) The Company had no significant concentrations in any one corporate industry.

Gross unrealized losses represent approximately 2% of the aggregate fair value of the related securities. Gross unrealized loses are comprised of sixty-eight issues with 87% of the individual security issues having an unrealized loss of less than $25,000. The gross unrealized losses include no security issue having a market value below 93% of book value.

Gross unrealized losses consist of sixty-six issues of investment-grade fixed maturities with $37.0 million market value with unrealized losses of $766,000 and two issues of less than investment-grade fixed maturities with $637,000 market value (1.7% of total market value of fixed maturity securities with unrealized losses) with unrealized losses of $13,000 (1.7% of total unrealized losses). Forty-eight issues of fixed maturities with $23.8 million market value with unrealized losses of $261,000 have been in loss positions for less than one year. Twenty issues with $13.9 million market value with unrealized losses of $518,000 have been in loss positions for one year or more. Only one fixed maturity issue with a market value of approximately $172,000 with an unrealized loss of approximately $2,000 has been is a loss position for more than one year and is less than investment grade.

The Company monitors the financial condition and operations of the securities rated below investment grade and of certain investment grade securities on which there are concerns regarding credit quality. In evaluating fixed maturities to determine whether any of the unrealized losses are other than temporary, management’s assessments as to the nature of declines in market values are based upon historical operating trends, business prospects, status of the industry in which the company operates, analyst ratings on the issuer and sector, the quality of the investments, the severity and duration of the unrealized losses and the Company’s ability or intent to hold the investments. When new information becomes available or the financial condition of the security issuer changes, the Company’s judgments may change, resulting in the recognition of a realized loss at that time. If market value is less than the carrying amount and the decline in value is determined to be other-than-temporary, an appropriate write-down is recorded. Significant losses in the carrying value of investments resulting from changes in economic conditions, change in state or federal laws and regulations and / or change in financial status of the security issuers could have a material adverse effect on earnings in future periods.

The Company has reviewed all securities in unrealized loss positions and concluded that there were no additional other-than-temporary impairments as of December 31, 2004. Due to the security issuers continued compliance with contractual terms and the expectation that the issuers will continue to comply, as well as the evaluation of the issuer’s financial condition, the Company believes that the securities in unrealized loss positions are not impaired. During 2004, the Company recorded gross realized losses of approximately $105,000 of which $64,000 related to other-than-temporary declines in fair value of available for sale fixed maturity securities, approximately $15,000 related to called securities and $26,000 related to bonds with realized losses amounting to less than 1% of book value.

The scheduled contractual maturities of the Company’s fixed maturity securities in unrealized loss positions at December 31, 2004 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.



	Amortized Cost		Market Value

	(in thousands)		(in thousands)
Scheduled Maturity
Due in one year or less	$	-	$	-
Due after one year through five years		8,330		8,264
Due after five years through ten years		12,738		12,487
Due after ten years		3,699		3,550
Mortgage-backed securities		13,661		13,348

Total fixed maturity securities	$	38,428	$	37,649

Agent Receivables. In the ordinary course of business, a subsidiary of USHEALTH advances commissions on policies written by its general agencies and their agents. Net agent receivables were $3.5 million and $4.5 million at December 31, 2004 and 2003, respectively. Such subsidiary is reimbursed for these advances from the commissions earned over the respective policy’s life. In the event that policies lapse prior to the time the subsidiary has been fully reimbursed, the general agency or the individual agents, as the case may be, are responsible for reimbursing the outstanding balance of the commission advance. A reserve for uncollectible agent’s balances is routinely established based upon historical experience and projected commission earnings. As of December 31, 2004 and 2003, the allowance for uncollectible commission advances was $3.6 million and $3.4 million, respectively.

Deferred Policy Acquisition Costs. Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits. Deferred policy acquisition costs totaled $20.7 million and $21.8 million at December 31, 2004 and 2003, respectively.

A premium deficiency exists if the present value of future net cash flows plus future policy benefit and claims reserves at the calculation date is negative or less than net deferred policy acquisition costs. The calculation of future net cash flows includes assumptions as to future rate increases and persistency. The Company routinely evaluates the recoverability of deferred acquisition costs in accordance with GAAP. At December 31, 2004, 2003 and 2002, there were no premium deficiencies requiring recognition.

Deferred Tax Asset. The Company’s net deferred tax asset before valuation allowance at December 31, 2004 and 2003 was $17.8 million and $18.4 million, respectively. As the Company reported substantial pre-tax losses for the year ended December 31, 2000, principally due to losses from major medical products issued prior to July 2000, applicable GAAP literature required that the Company’s net deferred tax asset be fully reserved as of December 31, 2000. The Company reported pre-tax losses for the years ended December 31, 2004, 2003 and 2002. Accordingly, the Company has reported no income tax benefit for 2004, 2003, and 2002 and the net deferred tax asset remains fully reserved at December 31, 2004. Applicable GAAP literature provides that the deferred tax asset valuation allowance may be eliminated once the Company achieves sustained profitability, as defined, and management concludes that it is more likely than not, that all or some portion of the deferred tax asset will be realized.

At December 31, 2004, the Company had available tax net operating loss carryforwards (“NOLs”) of $62.1 million that expire between 2012 and 2019. The establishment of a valuation allowance for GAAP does not impair the availability of NOLs for utilization in the Company’s federal income tax return.

Claim Reserves. Claim reserves are established by the Insurance Subsidiaries for benefit payments which have already been incurred by the policyholder but which have not been paid by the applicable Insurance Subsidiary. Claim reserves totaled $24.6 million at December 31, 2004 as compared to $26.2 million at December 31, 2003. The process of estimating claim reserves involves the active participation of experienced actuaries with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns. 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. For a reconciliation of claim reserves, see Note 8 to the Consolidated Financial Statements at Item 8.

Future Policy Benefit Reserves. Policy benefit reserves are established by each of the Insurance Subsidiaries for benefit payments that have not been incurred, but are estimated to be incurred, in the future. Policy benefit reserves totaled $53.5 million at December 31, 2004 as compared to $54.9 million at December 31, 2003. Policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the applicable Insurance Subsidiary’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. In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Insurance Subsidiaries’ policy benefit reserves, each Insurance Subsidiary relies primarily upon its own benefit payment history and upon information developed in conjunction with actuarial consultants and industry data. Persistency rates have a direct impact upon 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.

Policy benefit reserve requirements are also interrelated with product pricing and profitability. Each of the applicable Insurance Subsidiaries must price their respective products at a level sufficient to fund their policyholder benefits and still remain profitable. Because such 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 Insurance Subsidiaries failing to price their respective products appropriately and to generate sufficient premiums to fund the payment thereof.

Because the discount factor used in calculating policy benefit reserves is based upon the rate of return of the investments designed to fund this reserve, the amount of the reserve is dependent upon the yield on these investments. Provided that there is no material adverse experience with respect to these benefits, changes in future market interest rates will not have an impact on the profitability of policies already sold. Because fluctuations in future market interest rates affect the yield on new investments, they also affect the discount factor used to establish, and thus the amount of, its policy benefit reserves for new sales. In addition, because an increase in the policy benefit reserves in any period is treated as an expense for income statement purposes, market interest rate fluctuations can directly affect the profitability for policies sold in such period. It is not possible to predict future market interest rate fluctuations.

In accordance with GAAP, the Insurance Subsidiaries’ actuarial assumptions are generally fixed, and absent materially adverse benefit experience, they are not generally adjusted. Each of the Insurance Subsidiaries monitors the adequacy of its policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of its actuarial assumptions. The adequacy of 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 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 applicable Insurance Subsidiary insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the need to post additional reserves, which could have a material adverse effect upon an Insurance Subsidiaries’ business, financial condition or results of operations (see “Liquidity, Capital Resources and Statutory Capital and Surplus”).

Reinsurance. As is customary in the insurance industry, the Insurance Subsidiaries reinsure, or cede, portions of the coverage provided to policyholders to other insurance companies on both an excess of loss and a coinsurance basis. Cession of reinsurance is utilized by an insurer to limit its maximum loss; thereby, providing a greater diversification of risk and minimizing exposures on larger risks. Reinsurance does not discharge the primary liability of the original insurer with respect to such insurance, but the Company, in accordance with prevailing insurance industry practice, reports reserves and claims after adjustment for reserves and claims ceded to other companies through reinsurance.

The Insurance Subsidiaries reinsure risks under each of their respective major medical policies on an excess of loss basis so that its net payments on any one life insured under the policy are limited for any one calendar year to $150,000. Risks under its Medicare Supplement policies are not reinsured. Certain risks under the Insurance Subsidiaries’ Accidental Death policies are one hundred percent (100%) reinsured. Under its life insurance reinsurance agreement, FLICA and NFL retain fifty percent (50%) of the coverage amount of each of its life insurance policies written prior to June 30, 2004 and in force up to a maximum of $65,000. NFL reinsures, through an excess of loss reinsurance treaty, a closed block of annually renewable term life insurance policies. NFL’s retention limit is $25,000 per year. In accordance with industry practice, the reinsurance arrangements in force with respect to these policies are terminable by either party with respect to claims incurred after the termination and expiration dates.

At December 31, 2004, approximately $1.0 million of the $2.4 million recoverable from reinsurers is related to paid losses. Of this balance, all was recoverable from reinsurers rated “A” or higher by the A.M. Best Company.

Statutory Accounting Practices. The Insurance Subsidiaries are required to report their results of operations and financial position to state regulatory agencies based upon statutory accounting practices (“SAP”). See Item 1 – “Business – Regulation” for a description of the principle differences between GAAP and SAP accounting. The immediate charge off of sales and acquisition expenses and the sometimes conservative claim cost and other reserve valuation assumptions under SAP generally cause a lag between the sale of a policy and the emergence of reported earnings. Because this lag can reduce gain from operations on a SAP basis, it can have the effect of reducing the amount of funds available for dividend distributions from the Insurance Subsidiaries (see “Liquidity, Capital Resources and Statutory Capital and Surplus”).

OPERATING RESULTS

Results of operations for USHEALTH are reported below for the years ended December 31, 2004, 2003 and 2002.


	2004			2003			2002

Premiums	$	92,239		$	101,574		$	111,048
Other		1,820			2,308			2,670
Net investment income		5,446			6,151			7,722
Net realized gain (loss) on investments		141			238			(88	)

Total insurance revenues		99,646			110,271			121,352
Benefits and claims		60,344			68,536			78,299
Commissions		10,169			11,857			13,857
Change in deferred acquisition costs		1,119			727			11
General and administrative expense		21,474			22,497			23,464
Special executive compensation and severance		3,035			-			-
Taxes, licenses and fees		3,456			3,725			3,790
Interest expense on bank facilities		63			80			275
Interest expense on note payable to related party		966			2,450			2,199
Interest expense on redeemable preferred stock		-			1,851			-

Total insurance operating expenses		100,626			111,723			121,895

Insurance operating results		(980	)		(1,452	)		(543	)

Fee and service income (1)		3,607			7,104			6,567
Fee and service expenses (1)		2,752			5,934			5,530

Fee and service results		855			1,170			1,037

(Loss) income from continuing operations before
income taxes		(125	)		(282	)		494
Federal income tax expense		31			-			-

Loss from continuing operations		(156	)		(282	)		494

Loss from discontinued operations, including loss
on disposal in 2004 of ($1,369)(1)		(2,127	)		(1,066	)		(1,425	)
Federal income tax expense		-			-			-

Loss from discontinued operations		(2,127	)		(1,066	)		(1,425	)

Net loss		(2,283	)		(1,348	)		(931	)
Preferred stock dividends		(430	)		(1,759	)		(3,263	)

Loss applicable to common stockholders	$	(2,713	)	$	(3,107	)		(4,194	)

Insurance operating ratios*
Benefits and claims		65.4%			67.5%			70.5%
Commissions		11.0%			11.7%			12.5%
Change in deferred acquisition costs		1.2%			0.7%			-
General and administrative expense		22.8%			21.7%			20.6%
Taxes, licenses and fees		3.7%			3.7%			3.4%

(1)

In October 2004, the Company sold its printing subsidiary, Westbridge Printing Services, Inc. (“WPS”). The operating results of WPS are presented as loss from discontinued operations. Reclassifications of prior years’ amounts have been made to conform to the 2004 presentation.

*	Ratios are calculated as a percent of premiums with the exception of the general and administrative expense ratio, which is calculated as a percent of premiums plus other insurance revenues.

Overview. The Company reported net losses of ($2.3) million, ($1.3) million, and ($0.9) million for 2004, 2003 and 2002, respectively. The ($1.0) million increase in the net loss from 2003 to 2004 was principally due to non-recurring charges of ($3.0) million for executive compensation and severance and a ($1.1) million increase in loss from discontinued operations offset by a $3.3 million decrease in interest expense on notes payable to and redeemable preferred stock held by related parties.

Effective September 1, 2004, Benjamin M. Cutler was appointed Chairman and Chief Executive Officer of the Company. In connection with Mr. Cutler’s employment agreement, the Company recorded a $2.0 million liability for deferred compensation and $308,000 in employment expenses. In addition, the Company paid severance expense of approximately $727,000 to its former Chairman.

On October 29, 2004, the Company sold its printing subsidiary and exited the printing business. The loss from discontinued operations of ($2.1) million for 2004 is comprised of a ($1.4) million loss on sale of the printing subsidiary and a ($0.7) million operating loss compared to a ($1.1) million operating loss for 2003.

Interest expense on the note payable to related party decreased due to the restructuring of the note payable on December 31, 2003 that reduced the interest rate from 12% to 6% per annum. The Company’s preferred stock was converted to common stock on March 15, 2004.

On March 15, 2004, USHEALTH’s shareholders approved an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of common stock to 75 million shares from 30 million shares. The approval of this amendment resulted in the automatic conversion of all 37,504 outstanding shares of the Company’s convertible participating Series B preferred stock into 43,995,026 shares of common stock and eliminated the requirement to pay preferred stock dividends. As a result, preferred stock dividends of $430,000 accrued through March 15, 2004 were credited to capital in excess of par value and had no impact on total stockholders’ equity.

The results of operations for 2003 are not comparable to 2002 due to the third quarter 2003 implementation of Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”). Pursuant to SFAS 150, dividends of $1.9 million accrued subsequent to June 30, 2003 on the Company’s Series A Preferred stock outstanding were classified as interest expense, a component of pre-tax income, instead of a direct deduction to common stockholders’ equity. Excluding the impact of SFAS 150, the $1.4 million improvement in net income for 2003 as compared to 2002 was comprised principally of a $0.9 million increase in insurance operating results attributable to a 3.0 percentage point decline in the benefits and claim ratio.

The following narratives discuss the principal components of insurance operating results.

Premiums. The Insurance Subsidiaries’ premium revenue is derived principally from the following medical expense reimbursement products: comprehensive major medical, hospital/surgical medical expense, supplemental products including specified disease coverage and Medicare supplement. 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 laboratory and diagnostic services, as well as inpatient medicines. Hospital surgical medical expense products are similar to comprehensive major medical products with respect to benefits for inpatient services, except that deductibles and coinsurance provisions are generally higher. However, benefits for outpatient services are generally more limited under hospital/surgical medical expense coverage than comprehensive major medical coverage. Supplemental products include blanket group accident coverages, blanket group hospital daily indemnity coverages, as well as individual indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and “event specific” individual policies, which provide fixed benefits or lump sum payments directly to the insured upon diagnosis of certain types of internal cancer or heart disease. Prior to 1998, the Insurance Subsidiaries also underwrote Medicare supplement products and continue to receive renewal premiums from such policies.

Premium revenue, in thousands, for each major product line is set forth below:


	2004		2003		2002

Major medical:
First-year	$	15,481	$	18,329	$	22,336
Renewal		42,898		46,211		47,572

	$	58,379	$	64,540	$	69,908

Supplemental specified disease:
First-year		263		110		340
Renewal		19,722		20,843		22,328

	$	19,985	$	20,953	$	22,668

Medicare supplement:
Renewal	$	12,059	$	14,259	$	16,416
Other		1,816		1,822		2,056

Consolidated Premium Revenue	$	92,239	$	101,574	$	111,048

Total premiums decreased by (9.2%) in 2004 and (8.5%) in 2003 as compared to the corresponding prior year period. Major medical premiums declined due to lower new business sales resulting from delays in new product deliveries to NCM and a disciplined pricing philosophy focused upon profitability. In addition, supplemental specified disease and Medicare supplement premiums declined due to normal lapsing of policies.

Benefits and Claims. Benefits and claims are comprised of (1) claims paid, (2) changes in claim reserves for claims incurred (whether or not reported), and (3) changes in future policy benefit reserves (see Financial Condition – “Claims Reserves” and “Future Policy Benefit Reserves”). The 2.1 percentage point improvement in the ratio of consolidated benefits and claims to consolidated premiums in 2004 as compared to 2003 and the 3.0 percentage point improvement in 2003 as compared to 2002 is principally attributable to the Company’s adherence to a disciplined pricing philosophy for both new major medical product sales and in force insurance policies and the accelerated lapsing of unprofitable major medical products marketed prior to July 2000.

For the past several years, the costs of medical services covered by the Company’s major medical insurance policies has increased significantly, with medical inflation averaging 15% to 20% annually in comparison to an average increase in the consumer price index of 3%. To maintain the 2004 ratio of claims and benefits to premium into future periods, the Company must accurately estimate future medical inflation and implement timely premium rate increases for both new major medical product sales and the majority of its in force insurance policies, including supplemental specified disease and Medicare supplement policies.

Commissions. The commissions to premiums ratio decreased by 0.7 and 0.8 percentage points in 2004 and 2003, respectively, as compared to the corresponding prior year as a result of the decrease in first year major medical premiums. Commission rates on first year premiums are significantly higher than those for renewal premiums.

LIQUIDITY, CAPITAL RESOURCES, AND STATUTORY CAPITAL AND SURPLUS

General. The primary sources of cash for the Company’s consolidated operations are premiums and fees from insurance policies, sales and maturity of invested assets and investment income while the primary uses of cash are payments of insurance policy benefits, claims and commissions, and general operating expenses. Net cash provided by (used in) operations totaled $1.8 million, ($1.1) million and ($5.0) million for the years ended December 31, 2004, 2003 and 2002, respectively. The increase in cash provided / decrease in cash used by operations from year to year is principally due to a decline in the cash basis ratio of benefits and claims to premiums.

USHEALTH is a holding company, the principal assets of which consist of the capital stock of its subsidiaries and invested assets. USHEALTH’s principal sources of funds are comprised of dividends from its non-insurance subsidiaries. The Insurance Subsidiaries are precluded from paying dividends without prior approval of the Texas Insurance Commissioner, as the Insurance Subsidiaries’ earned surplus is negative due to statutory losses incurred prior to 2003 (see “Business – State Regulation” at Item 1). USHEALTH’s principal uses of cash are for general and administrative expenses and to make discretionary additional investments in its Insurance Subsidiaries in the form of capital contributions to maintain desired statutory capital and surplus levels. USHEALTH funded capital contributions to the Insurance Subsidiaries totaling approximately $812,000 and $2.3 million during 2003 and 2002, respectively, and made no capital contributions during 2004. The Insurance Subsidiaries reported statutory net income (losses) for 2004, 2003, and 2002 of $2.6 million, $1.1 million, and ($2.7) million, respectively. As of December 31, 2004, USHEALTH had approximately $3.5 million in unrestricted cash and invested assets as compared to $2.4 million at December 31, 2003.

Conversion of Related Party Preferred Stock. On March 15, 2004, USHEALTH’s shareholders approved an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of common stock to 75 million shares from 30 million shares. The approval of this amendment resulted in the automatic conversion of all 37,504 outstanding shares of the Company’s Series B convertible participating preferred stock (“Series B Preferred Stock”) into 43,995,026 shares of common stock. All outstanding shares of the Series B Preferred Stock were held by Special Situations Holdings, Inc. – Westbridge (“SSHW”), the Company’s largest shareholder. The conversion of the Series B Preferred Stock increased the ownership percentage of SSHW in the Company’s common stock to approximately 93% from 49%.

Related Party Financing. USHEALTH received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from Credit Suisse First Boston Management LLC, (“CSFBM”), which is an affiliate of SSHW (USHEALTH’s largest common stockholder), and a subsidiary of Credit Suisse First Boston LLC (“CSFB”). The Credit Agreement relating to that loan (“CSFBM Credit Agreement”) provided USHEALTH with total loan commitments of $11 million, all of which were drawn in April 2001. Under restructured terms effective December 31, 2003, the loan bears interest at a rate of 6% per annum and matures in March 2010. Absent any acceleration following an event of default, USHEALTH may elect to pay interest in kind by issuance of additional notes. During 2004, USHEALTH issued approximately $958,000 in additional notes for payment of interest in kind which increased the notes payable balance to CSFBM at December 31, 2004 to approximately $16.2 million. USHEALTH’s obligations to CSFBM are secured, pursuant to a guaranty and security agreement and pledge agreements, by substantially all of the assets of USHEALTH 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 bank financing described below). USHEALTH’s subsidiaries (other than those listed above) have also guaranteed USHEALTH’s obligations under the CSFBM Credit Agreement. At December 31, 2004, there were no events of default.

Bank Financing. The majority of commission advances to NCM’s and ACB’s agents are financed through Ascent Funding, Inc. (“AFI”), an indirect wholly owned subsidiary of USHEALTH. On December 31, 2003, AFI entered into a Credit Agreement (the “Credit Agreement”) with Frost National Bank (“Frost”) that provides AFI with a $3.0 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and other affiliates. As of December 31, 2004 and 2003, $250,000 and $500,000, respectively, were outstanding under the Credit Agreement. The Credit Agreement as amended matures on January 15, 2007, at which time the outstanding principal and interest will be due and payable. The Company maintains an agent receivable financing arrangement to facilitate growth in new business sales.

AFI’s obligations under the Credit Agreement are secured by liens upon substantially all of AFI’s assets. AFI’s principal assets at December 31, 2004 are net agent receivables of $3.5 million. In addition, NCM, ACB and USHEALTH have guaranteed AFI’s obligation under the Credit Agreement, and have pledged all of the issued and outstanding shares of the capital stock of AFI, NFL, and FLICA as collateral for those guaranties (the “Guaranty Agreements”). As of December 31, 2004, there were no events of default under the Credit or Guaranty Agreements.

Inflation. Inflation impacts claim costs and overall operating costs and, although inflation has been lower in the last few years, hospital and medical costs have still increased at a higher rate than general inflation, especially prescription drug costs. New, more expensive and wider use of pharmaceuticals is inflating health care costs. The Company will continue to establish premium rates in accordance with trends in hospital and medical costs along with concentrated efforts in various cost containment programs. However, there can be no assurance that these efforts will fully offset the impact of inflation or that increases in premium rates will equal or exceed increasing healthcare costs.

CONTRACTUAL OBLIGATIONS

The following table provides information on the Company’s known contractual obligations, in thousands, as of December 31, 2004:


	Payments due by period

Contractual obligations	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years

Note payable to related party⁽¹⁾	$	16,228		-		-		-	$	16,228
Note payable to bank⁽²⁾		250		-		250		-		-
Future policy benefits ⁽³⁾		53,493		11,372		12,170		9,836		20,115
Claim liabilities ⁽³⁾		24,619		18,438		3,106		762		2,313
Executive compensation ⁽⁴⁾		2,000		-		-		-		2,000
Capital lease obligations		228		171		57		-		-
Operating lease obligations⁽⁵⁾		5,681		1,397		2,062		1,676		546

	$	102,499	$	31,378	$	17,645	$	12,274	$	41,202

(1)

Excludes interest at a rate equal to 6% that may be paid in cash or in kind by issuance of additional notes.

(2)

Excludes interest at a rate equal to the Prime Rate, plus one-half percent per annum.

(3)

The payments related to future policy benefits and claim liabilities have been projected utilizing assumptions based upon the Company’s historical experience and anticipated future experience. Significant uncertainties relating to these liabilities include morbidity, mortality, persistency, expenses, inflation, contract terms and the timing of payments. The determinations of these liability amounts are based upon estimates and the timing of payments are not always reasonably fixed and determinable. As such, the amounts of the payments and the timing of such payments may actually differ from those presented in the above table.

(4)

Excludes interest at a rate equal to 6% per annum.

(5)

Includes payments under a lease for a printer whereby USHEALTH is contractually a co-lessee. Under terms of the sale and purchase agreement of its printing subsidiary, the former printing subsidiary and the new owner of such former printing subsidiary are primarily liable.

PART IV

ITEM 15 — EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The documents set forth below are filed as part of this report.

Exhibits:

The following exhibits are filed herewith.

31.1*	Certification of Benjamin M. Cutler, Chairman and Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification of Cynthia B. Koenig, Chief Financial Officer and Treasurer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

Since the registrant filed its 10-K on March 9, 2005, the registrant filed a Report on Form 8-K dated May 3, 2005 under “Item 9. Regulation FD Disclosure” and also under “Item 12. Results of Operations and Financial Condition” attaching a copy of the registrants press release reporting the registrants financial results for the first quarter of 2005.

*Filed Herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on the 21st day of June 2005.

	USHEALTH GROUP, INC.

	/s/ Cynthia B. Koenig Cynthia B. Koenig Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

USHEALTH Group, Inc. 10-K/A