SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
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Commission File Number 0-14320
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UICI
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(Exact name of registrant as specified in its charter)
Delaware 75-2044750
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4001 McEwen, Suite 200, Dallas, Texas 75244
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (972) 392-6700
Not Applicable
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Former name, former 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Common Stock, $.01 Par
Value--46,229,000 shares as of March 31, 1998.
INDEX
UICI AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Consolidated condensed balance sheets-March 31, 1998 and
December 31, 1997 3
Consolidated condensed statements of income-Three months
ended March 31, 1998 and 1997 4
Consolidated statements of comprehensive income-Three
months ended March 31, 1998 and 1997 5
Consolidated condensed statements of cash flows-Three
months ended March 31, 1998 and 1997 6
Notes to consolidated condensed financial
statements-March 31, 1998 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 13
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Item 6. Exhibits and Reports on Form 8-K 13
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SIGNATURES 14
2
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share amounts)
March 31, December 31,
1998 1997
(Unaudited) (Note)
----------- ------------
ASSETS
Investments:
Securities available for sale--
Fixed maturities, at fair value
(cost: 1998--$835,155; 1997--$811,757) ......... $ 851,046 $ 831,460
Equity securities, at fair value
(cost: 1998--$22,142; 1997--$12,302) ........... 24,196 14,555
Student loans .......................................... 291,191 11,254
Mortgage and collateral loans .......................... 26,428 27,023
Policy loans ........................................... 21,850 22,173
Credit card loans ...................................... 72,107 54,068
Real estate investments ................................ 32,216 32,193
Short-term investments ................................. 141,985 141,040
---------- ----------
Total investments ................................ 1,461,019 1,133,766
Cash ..................................................... 13,242 15,932
Agents' receivables ...................................... 13,152 13,662
Reinsurance receivables .................................. 76,492 78,696
Due premiums and other receivables ....................... 66,831 58,822
Investment income due and accrued ........................ 14,857 14,063
Deferred acquisition costs ............................... 102,440 99,611
Goodwill ................................................. 118,518 111,067
Property and equipment, net .............................. 44,347 46,634
Other .................................................... 9,541 7,130
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$1,920,439 $1,579,383
========== ==========
LIABILITIES
Policy liabilities:
Future policy and contract benefits .................... $ 483,950 $ 487,024
Claims ................................................. 282,353 258,821
Unearned premiums ...................................... 113,445 105,696
Other policy liabilities ............................... 15,752 19,751
Federal income taxes ..................................... 23,806 19,891
Other liabilities ........................................ 78,664 60,477
Funds held for others .................................... 34,039 25,957
Short-term debt .......................................... 17,022 20,184
Long-term debt ........................................... 30,415 30,018
Student loan credit facility ............................. 282,690 --
---------- ----------
1,362,136 1,027,819
MINORITY INTERESTS .......................................... 16,469 15,274
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share ................... 462 462
Preferred stock, par value $.01 per share ................ -- --
Additional paid-in capital ............................... 165,891 165,891
Net unrealized investment gains .......................... 11,667 14,280
Retained earnings ........................................ 363,814 355,657
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541,834 536,290
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$1,920,439 $1,579,383
========== ==========
NOTE: The balance sheet as of December 31, 1997 has been derived from the
audited financial statements at that date.
See notes to consolidated condensed financial statements.
3
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME(Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
1998 1997
-------- --------
REVENUE
Premiums
Health .......................................... $181,810 $137,036
Life premiums and other considerations .......... 12,717 11,667
Net investment income ............................. 22,717 20,326
Fees and other income ............................. 58,750 30,386
Gains on sale of investments ...................... 1,817 838
-------- --------
277,811 200,253
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ......... 145,874 93,705
Underwriting, acquisition, and other expenses ..... 115,625 74,269
Interest expense .................................. 729 680
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$262,228 $168,654
INCOME BEFORE FEDERAL INCOME TAXES
AND MINORITY INTERESTS .......................... 15,583 31,599
Federal income taxes ................................. 4,840 10,125
-------- --------
INCOME BEFORE MINORITY INTERESTS ................ 10,743 21,474
Minority interests ................................... 2,586 1,182
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NET INCOME ...................................... $ 8,157 $ 20,292
======== ========
NET INCOME PER SHARE ............................ $ 0.18 $ 0.45
======== ========
See notes to consolidated condensed financial statements.
4
UICI AND SUBSIDIARIES
STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Three Months Ended
March 31,
1998 1997
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Net income ......................................................... $ 8,157 $ 20,292
Other comprehensive income (loss), before tax:
Unrealized gains (losses) in securities:
Unrealized holding gains (losses) arising during period ....... (4,012) (13,489)
Less: reclassification adjustment for losses
included in net income ...................................... -- 3,479
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Other comprehensive loss,
before tax ....................................... (4,012) (10,010)
Income tax benefit related to items of
other comprehensive income .................................. 1,399 2,690
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Other comprehensive loss, net of tax............... (2,613) (7,320)
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Comprehensive income ............................................... $ 5,544 $ 12,972
======== ========
5
UICI AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
1998 1997
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OPERATING ACTIVITIES
Net income .................................................. $ 8,157 $ 20,292
Adjustments to reconcile net income to
cash provided by operating activities:
Increase in policy liabilities ............................ 28,124 18,850
Increase in funds held for others ......................... 8,081 --
Increase in other liabilities ............................. 15,487 3,435
Increase in federal income taxes payable .................. 5,144 5,943
Increase in deferred acquisition costs .................... (2,829) (1,459)
Increase in accrued investment income
and reinsurance and other receivables ................. (6,598) (4,483)
Depreciation and amortization ............................. 2,066 1,844
Net income attributable to minority interests ............. 2,586 1,183
Gains on sale of investments .............................. (1,817) (838)
Other items, net .......................................... (2,482) (567)
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Cash Provided by Operations ........................... 55,919 44,200
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INVESTING ACTIVITIES
Increase in other investments ............................... (49,512) (2,469)
(Increase) decrease in student loans ........................ (279,937) 10,960
Decrease (increase) in agents' receivables ................. 510 (11,166)
Purchase of subsidiaries and assets, net of cash acquired
of $2,137 in 1997 ......................................... -- (12,387)
Minority interest purchased ................................. (6,000) (15,062)
Decrease (increase) in property and equipment ............... 1,472 (2,121)
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Cash Used in Investing Activities ..................... (333,467) (32,245)
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FINANCING ACTIVITIES
Deposits from investment products ........................... 4,472 4,731
Withdrawals from investment products ........................ (8,388) (11,378)
Proceeds from student loan credit facility .................. 282,690 --
Proceeds from debt .......................................... 480 --
Repayments of debt .......................................... (3,245) (1,068)
Proceeds from exercise of stock options and warrants ........ -- 33
Purchase of treasury stock .................................. -- (194)
Distributions to minority interests ......................... (1,151) (1,229)
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Cash Provided by (Used in) Financing Activities ....... 274,858 (9,105)
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Net Increase (Decrease) in Cash ....................... (2,690) 2,850
Net Cash at Beginning of Period ....................... 15,932 15,420
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Cash at End of Period ................................. $ 13,242 $ 18,270
========= ========
See notes to consolidated condensed financial statements.
6
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements for UICI
and its subsidiaries (the Company) have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three-month period ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997. Certain amounts in the 1997 financial statements have been
reclassified to conform with the 1998 financial statement presentation.
NOTE B--STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS (SFAS)
Effective January 1, 1998, the Company adopted FASB Statement No. 130,
"Reporting Comprehensive Income." Statement 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements at calendar year end 1998. Management does not anticipate that the
adoption of this statement will have a significant effect on the Company's
reported segments.
7
NOTE C--EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
1998 1997
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(In thousands, except per share amounts)
Net income available to common shareholders ....... $8,157 $20,292
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Weighted average shares outstanding--
basic earnings per share ..................... 46,229 45,128
Effect of dilutive securities:
Employee stock options ....................... 31 44
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Weighted average shares outstanding--
dilutive earnings per share .................. 46,260 45,172
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Basic and diluted earnings per share .............. $0.18 $0.45
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements set forth herein or incorporated by reference herein
from the Company's filings that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: changes in general economic
conditions, including the performance of financial markets, and interest rates;
competitive, regulatory or tax changes that affect the cost of or demand for the
Company's products; health care reform, ability to predict and effectively
manage claims related to health care costs; reliance on key management and
adequacy of claim liabilities. The Credit Card segment's future results also
could be adversely affected by the possibility of future economic downturns
causing an increase in credit losses. The Company has certain risks associated
with the Student Loan business. The changes in the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder may adversely impact the education credit market. In
addition, existing legislation and future measures to reduce the federal budget
deficit may adversely affect the amount and nature of federal financial
assistance available with respect to loans made through the U.S. Department of
Education. Finally the level of competition currently in existence in the
secondary market for loans made under the Federal Loan Programs could be
reduced, resulting in fewer potential buyers of the Federal Loans and lower
prices available in the secondary market for those loans. Investors are also
directed to other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
8
PART I. FINANCIAL INFORMATION
ITEM 2 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations
UICI and its subsidiaries (the "Company") reported net income of $0.18 per share
for the three month period ended March 31, 1998 compared to net income of $0.45
per share for the comparable period in 1997. Included in net income are gains
from the sale of investments of $0.02 per share for the three month period ended
March 31, 1998 and $0.01 per share for 1997.
The Company's business segments are: (1) Insurance, which includes the
businesses of the Self Employed Agency Division, the Student Insurance Division,
the OKC Division, the Special Risk Division and the National Motor Club
Division; (ii) Financial Services, which includes the businesses of the Credit
Services Division, the Educational Finance Group Division, the Insurdata
Division and Other Business Units and (iii) Other Key Factors. Allocation of
investment income is based on a number of assumptions and estimates and the
segments reported operating results would change if different methods were
applied. Segment revenues include premiums and other policy changes and
considerations, net investment income, and fees and other income. Financial
information by segment for revenues and income before federal income taxes is
summarized as follows:
Three Months Ended
March 31,
1998 1997
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(In thousands)
Revenues
Insurance:
Self Employed Agency ................ $ 149,201 $ 122,216
Student Insurance ................... 25,854 22,065
OKC Division ........................ 22,435 22,064
Special Risk ........................ 17,531 1,847
National Motor Club ................. 7,053 --
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222,074 168,192
Financial Services:
Credit Services ..................... 17,899 10,141
Educational Finance Group ........... 7,481 --
Insurdata ........................... 9,868 3,661
Other Business Units ................ 18,726 11,355
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53,974 25,157
Other Key Factors ..................... 8,503 6,905
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284,551 200,254
Inter Segment Eliminations ............ (6,740) --
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Total Revenues ........................... $ 277,811 $ 200,254
========= =========
9
Three Months Ended
March 31,
1998 1997
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(In thousands)
Income (loss) before federal income taxes
Insurance:
Self Employed Agency ............................... $ (6,292) $ 14,340
Student Insurance .................................. 2,392 3,744
OKC Division ....................................... 4,342 5,240
Special Risk ....................................... 1,174 66
National Motor Club ................................ 1,014 --
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2,630 23,390
Financial Services:
Credit Services .................................... 5,405 4,521
Educational Finance Group .......................... 162 --
Insurdata .......................................... 971 (187)
Other Business Units ............................... 1,499 (756)
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8,037 3,578
Other Key Factors ..................................... 4,916 4,631
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$ 15,583 $ 31,599
======== ========
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31,
1998 COMPARED TO 1997
SELF EMPLOYED AGENCY DIVISION ("SEA"). Operating losses for the SEA
Division were $6.3 million for the three month period in 1998 compared to income
of $14.3 million in 1997. The lower earnings of SEA are the result of conforming
the method used to compute the claim reserves on SEA's business and the
continuing losses on certain managed care products.
The claim reserving method employed by the previous administrator of a portion
of SEA's insurance business was not comparable to the traditional reserving
methods employed by the Company for its other self employed health insurance.
While both reserving methods are acceptable for statutory and GAAP reporting,
the Company's method is the more conservative of the two methods. The decision
to conform the two methods at a time when a continuing evaluation of rates and
rate changes is critical in managing the block to profitability. Conforming the
two methods resulted in an increase in the claim reserves of $12 million at
March 31, 1998.
The operating losses for the managed care products were worse than expected
in the first quarter of 1998 while the traditional indemnity products continued
to produce acceptable profits. The losses for the first quarter were due to
higher loss ratios on those managed care products with lower deductibles and a
slower than anticipated implementation of rate increases on the managed care
products due, in part, to obtaining regulatory approval of the rate increases in
certain states. The Company is continuing the process of redesigning products,
raising deductibles and co-payment amounts, implementing approved rate
increases, and reexamining our ability to earn adequate returns in certain
states. It will take three to six months for the results of these actions to be
reflected in the reported financial results.
10
Revenue for the SEA Division increased to $149.2 million for the three month
period in 1998 from $122.2 million in 1997, an increase of 22%. The increase in
revenues for the year was the result of the continued increase in the percentage
of the UGA premium that is written directly on the policies of the Company and
the decrease in premium that is 60% coinsured.
STUDENT INSURANCE. Operating income for the Student Insurance Division
decreased to $2.4 million in the first quarter of 1998 compared to $3.7 million
in the first quarter of 1997. The reduced earnings reflect lower margins
resulting from increased loss ratios and moving the college and university sales
organization from Student Insurance to Educational Finance Group. The increased
loss ratio is due to more competition in the university health insurance market
which has resulted in price competition. Revenue for Student Insurance increased
to $25.9 million in 1998 from $22.1 million in 1997. The increase is due
primarily to the acquisition of a block of business with annual premium of $12
million.
OKC DIVISION. Operating income for the OKC Division was $4.3 million for
the three month period in 1998 compared to $5.2 million in 1997. The decrease
was due to higher than normal earnings in the first quarter of 1997. Revenues
for the OKC Division were comparable for the three month period in 1998 when
compared to 1997.
SPECIAL RISK DIVISION. Operating income for the Special Risk Division was
$1.2 million and revenues were $17.5 million for the three month period in 1998.
The major operations of this Division were acquired during the second and third
quarter of 1997.
NATIONAL MOTOR CLUB ("NMC"). Operating income for NMC was $1.0 million in
the first three months of 1998 on revenues of $7.1 million. NMC was acquired by
the Company in the third quarter of 1997.
CREDIT SERVICES. Operating income for the Credit Services business was $5.4
million for the three month period in 1998 compared to $4.5 million in 1997. The
increase is primarily due to the continued growth in new sales which increases
revenue and operating income and better performance by the credit card
portfolio. The annualized charge-off rate during the first quarter was similar
to the fourth quarter of 1997 and the percentage of balances over 30 days
delinquent at March 31, 1998 was comparable to December 31, 1997.
EDUCATIONAL FINANCE GROUP ("EFG"). Operating income for EFG was $162,000
for the three month period of 1998. EFG was acquired during the second quarter
of 1997. On March 31, 1998, EFG completed a $300 million revolving line of
credit of which $280.7 million was used to acquire existing loans. The credit
facility is secured by student loans originated under the Federal Family
Education Loan Program ("FFELP") which are guaranteed by the federal government
or alternative loans guaranteed by private guarantors. This will allow EFG to
earn the spread between the interest rate earned on the loans and the cost of
the revolving line of credit on all loans financed through this credit facility.
EFG had a successful first quarter with new loan sales in line with our
expectations. The profits from the loans sold during the first quarter of 1998
will be recognized in future periods from the interest spread earned on the
loans. The acquisition of these loans is the primary reason for the increase in
the total assets of the Company since December 31, 1997.
11
INSURDATA. Operating income for Insurdata was $971,000 for the three month
period in 1998 compared to an operating loss of $187,000 in the first quarter of
1997. The operating income for the first quarter is indicative of the earnings
Insurdata should have for the remainder of 1998. Revenues for Insurdata were
$9.9 million in the three month period in 1998 compared to $3.7 million in 1997.
The increase in revenues is due to $4.6 million of revenue for providing the
outsourcing of data processing services for the health insurance operations of
the Company in the first quarter of 1998 and growth in revenue from other
customers. Insurdata did not start providing the outsourcing services for the
Company until the second quarter of 1997.
OTHER KEY FACTORS. Other Key Factors include investment income not
allocated to the other segments, interest expense, general expenses relating to
corporate operations, amortization of goodwill and realized gains or losses on
sale of investments. Operating income for the Other Key Factors was $4.9 million
for the three month period in 1998 compared to $4.6 million in 1997. The
increase was primarily due to an increase in realized gains on the sale of
investments which was partially offset by an increase in amortization of
goodwill when compared to 1997. The increase in goodwill amortization is the
result of acquisitions made during 1997. The amount of realized gains or losses
on the sale of investments is a function of interest rates, market trends and
the timing of sales. In addition, the net unrealized investment gains on
securities classified as "available for sale," reported as a separate component
of stockholders' equity and net of applicable income taxes and minority
interests was $11.7 million at March 31, 1998 compared to $14.3 million at
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's invested assets increased to $1,461.0 million at March 31,
1998 compared to $1,133.8 million at December 31, 1997. The primary sources for
the asset growth were the acquisition of student loans by the EFG business unit
and cash provided by current year operations. The sources were partially offset
by withdrawals, net of deposits, from investment products.
On March 31, 1998 EFG completed a $300 million revolving line of credit of
which $280.7 million was used to acquire existing loans.
12
PART II. OTHER INFORMATION
ITEM 4 -- Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 5, 1998. The
following members were elected to the Company's Board of Directors to
hold office for the ensuing year.
Nominee In Favor Withheld
------------- ----------- --------
Ronald L. Jensen 38,527,672 137,619
Gary L. Friedman 38,528,307 136,984
J. Michael Jaynes 38,507,175 158,116
Richard J. Estell 38,511,484 153,807
Richard T. Mockler 38,517,286 148,005
Vernon R. Woelke 38,527,546 137,745
Charles T. Prater 38,381,330 283,961
John E. Allen 38,527,323 137,968
The results of the voting on the appointment of auditors were as follows:
Ratification of Appointment of Ernst & Young, LLP as the Company's
independent auditors for the fiscal year ending December 31, 1998.
The votes of the stockholders on this item were as follows:
In Favor Opposed Abstained
-------- ------- ---------
38,595,050 4,764 65,477
ITEM 6 -- Exhibits and Reports on Form 8-K
Number
------
(a) Exhibits.
3.2(A) Restated By-Laws of UICI
(b) Reports on Form 8-K
(1.) A current report on Form 8-K dated March 2, 1998 concerning
appointment of Chief Financial Officer and results for
January 1998.
(2.) A current report on Form 8-K dated May 4, 1998 announcing
earnings for the first quarter of 1998 would be less than
expected and would not meet analyst expectations.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UICI
----
(Registrant)
Date: May 14, 1998 /s/Ronald L. Jensen
-------------------
Ronald L. Jensen, Chairman of
the Board, President and Director
Date: May 14, 1998 /s/Warren B. Idsal
------------------
Warren B. Idsal, Vice President
(Chief Financial Officer)
14