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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE #0-11321
UNIVERSAL AMERICAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2580136
(State of Incorporation) (I.R.S. Employer I.D. Number)
Six International Drive, Suite 190, Rye Brook, NY 10573
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (914) 934-5200
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange
Title of Class on which Registered
Common Stock, par value $.01 per share NASDAQ
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 2001 was approximately $65,293,000.
The number of shares outstanding of the Registrant's Common Stock as
of March 1, 2001 was 46,925,921.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the
document is incorporated:
(1) Proxy Statement for the 2001 Annual Meeting incorporated
by reference into Part III.
(2) Exhibits listed in Item 14 (b), Part IV, incorporated by
reference to Proxy Statement dated July 12, 1999, Forms
8-K dated August 13, 1999 and March 16, 2001, Form 8-K/A
dated March 16, 2001, Form 10-Q dated November 15, 1999
and Form 10-K for 1996.
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PART I
ITEM 1 - BUSINESS
GENERAL DESCRIPTION
Universal American Financial Corp. (the "Company" or "Universal
American",) is the parent holding company for a group of life and health
insurance companies and administrative services companies with special expertise
in servicing senior market insurance products. The Company develops, markets and
administers its insurance products through the following nine insurance
companies (collective, the "Insurance Subsidiaries"):
Senior Market Brokerage
- American Progressive Life & Health Insurance Company of
New York ("American Progressive")
- American Pioneer Life Insurance Company ("American
Pioneer")
- American Exchange Life Insurance Company ("American
Exchange")
- Constitution Life Insurance Company ("Constitution Life")
- Marquette National Life Insurance Company ("Marquette")
- Peninsular Life Insurance Company ("Peninsular Life")
- Union Bankers Insurance Company ("Union Bankers")
Career Agency
- Pennsylvania Life Insurance Company ("Pennsylvania Life")
- PennCorp Life Insurance Company of Canada ("PennCorp Life
of Canada")
The Senior Market Brokerage segment focuses on products designed for the
senior market, including supplemental health insurance, long-term care, final
expense life insurance and annuities. The Career Agency segment traditionally
concentrated on selling fixed benefit accident and sickness insurance and
individual life insurance products to the self-employed market but recently has
expanded into the senior market. In addition, the Company maintains a Special
Markets segment, which manages the products that are not within the Company's
core focus. Collectively the Insurance Subsidiaries are licensed to do business
in all fifty states and all the provinces of Canada.
Universal American also owns a group of three companies that perform
administrative services for insured and non-insured products, primarily for the
senior market, (collectively, the "Administrative Services Companies"):
- CHCS Services, Inc. ("CHCS")
- WorldNet Services Corp. ("WorldNet")
- American Insurance Administration Group, Inc. ("AIAG")
The Administrative Services Companies, which comprise Universal
American's fourth operating segment, perform underwriting, policy
administration, claims management and administration, and communication services
on behalf of 35 unaffiliated companies and 6 of the Insurance Subsidiaries.
The Company also maintains a corporate segment which comprises
activities of the holding company, including interest on corporate debt.
BUSINESS STRATEGY
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Universal American's strategy has been, and continues to be, growth
through a combination of organic growth, acquisition and execution. The Company
has grown internally through the development of competitive insurance products
particularly geared for the senior market, and the expansion of its distribution
channels and geographical reach. It has expanded beyond its traditional
insurance business to the administration of senior market insured and
non-insured products. Its external growth has been achieved through the
acquisition of nine insurance companies, three blocks of insurance business and
three administrative services companies since 1991.
One of the most important elements of the past and future growth of
Universal American is its commitment to execution. The Company has successfully
integrated the acquisitions into its own operations and has continued to improve
its service and reduce its operating costs.
Further, Universal American has sharpened its focus on its core
businesses. In the past few years, the Company has exited, sold or de-emphasized
a number of lines of businesses that do not fit within its strategy or core
competencies.
RECENT ACQUISITIONS AND DIVESTITURES
Acquisition of American Insurance Administration Group, Inc. ("AIAG")
In January 2000, Universal American acquired AIAG, a privately-held
third party administrator located in Clearwater, Florida, for $5.8 million,
including $2.9 million in cash and 809,860 shares of Universal American common
stock. AIAG is a third party administrator of approximately $125 million of
senior health insurance, for which it received administrative fees of $10.1
million in 2000. In 2000, AIAG generated $4.5 million of cash flow and $1.6
million of pre-tax income. This acquisition strengthened the Company's expertise
and capacity to administer senior market products.
Acquisition of Capitated Healthcare Services, Inc. ("CHCS")
In August 2000, Universal American acquired CHCS, a privately held
administrator of long term care products located in Weston, Florida, for $4.6
million, including $3.3 million in cash, 64,820 shares of Universal American
common stock and future cash payments totaling $1.0 million over 18 months. CHCS
administers long-term care and home health care insured and non-insured products
for 21 unaffiliated insurance companies and three affiliated insurance
companies. As of December 31, 2000, CHCS had contracts in force with expected
annual fees of $6.5 million for 2001. This acquisition enhanced the Company's
expertise in the long term care business.
1999 Acquisition
On July 30, 1999, Universal American acquired six insurance companies
and certain other assets from PennCorp Financial Group (the "1999 Acquisition").
The 1999 Acquisition enhanced the Company's prospects for future organic growth
through geographic expansion and through the addition of a career agency
marketing channel to supplement the brokerage agency marketing channel.
In January 2000, the Company began the integration of the operations
of the acquired companies from Raleigh, North Carolina into existing Universal
American locations in Toronto (Canada), Pensacola (Florida) and Orlando
(Florida). The Company completed this integration in February 2001. For further
information on the 1999 Acquisition, see Note 3 to notes to consolidated
financial statements.
Cancellation of Major Medical Insurance
In the fourth quarter of 2000, the Company decided to exit its
under-performing individual major medical business to the extent possible. The
Company believes it will be able to cancel, by the end of 2002, approximately
$27 million of the $31 million of annualized premium that was in force on
December 31,
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2000. The remaining run-off premium in force will continue to be managed in the
Special Markets Segment.
ADMINISTRATIVE SERVICES COMPANIES
In 2000, Universal American increased its efforts to build its
Administrative Services business by the acquisition of CHCS and AIAG and by the
expansion of its product lines, particularly in the long term care field. The
companies perform the full range of administrative services for senior market
insured products, including policy underwriting, telephone verification,
policyholder services, claims adjudication, clinical case management, care
assessment and referral to health care facilities. Increasingly, these companies
are performing similar services, particularly in the long term care area, for
non-insured products offered both by insurers and non-insurance companies. For
the year ended December 31, 2000, this segment had revenues of $24.1 million,
$12.7 million from 35 unaffiliated companies and $11.4 million from the
Insurance Subsidiaries, and earnings before taxes, depreciation and amortization
of $6.8 million.
INSURANCE MARKETING AND DISTRIBUTION
Historically, Universal American marketed its products through a
traditional general agency system. As a result of the acquisition of
Pennsylvania Life and PennCorp Life of Canada in 1999, the Company now
distributes its products through a career agency system as well. The following
shows table shows the new sales (issued premiums) by distribution channel and by
major product line for the three years ended December 31, 2000:
Product 2000 1999 1998
------- ---- ---- ----
Senior Market Brokerage
Accident and Health
Medicare Supplement $ 78,213 $ 30,771 $ 13,553
Long Term Care 4,580 4,058 3,928
Other Senior Health 244 241 524
Total Senior Health 83,037 35,070 18,005
Senior Life Insurance 2,106 1,495 2,639
Total Senior Market Brokerage 85,143 36,565 20,644
Career Agency
Accident & Health 20,750 20,000 --
Life Insurance 1,500 2,000 --
Total Career Agency 22,250 22,000 --
Special Markets
Accident & Health 6,988 8,175 9,785
Life Insurance 546 555 939
Total Special Markets 7,534 8,730 10,724
TOTAL ISSUED PREMIUM $114,927 $ 67,295 $ 31,368
Senior Market Brokerage
Universal American emphasizes on the sale of products that appeal to
the senior market, largely through independent marketing organizations with
concentrations in this segment. The Company
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currently sells these products primarily in 25 states with particular
concentration in the Southeast, the Southwest and the Northeast. These marketing
organizations typically recruit and train their own agents, bearing all of the
costs incurred in connection with developing their organization. This
distribution channel has approximately 16,000 independently licensed agents. In
2000, this segment accounted for $255.3 million and $52.1 million, respectively,
or 56.6% and 23.7%, respectively, of the Company's gross premiums and net
premiums earned. New sales (issued premium) for this segment amounted to $85.1
million and $36.6 million in 2000 and 1999, respectively.
Career Agency System
As part of the 1999 Acquisition, the Company acquired a viable career
agency force that distributes fixed benefit accident and sickness insurance,
including accidental disability, and life insurance to the self-employed market.
A core part of Universal American's strategy has been to introduce its senior
market products through this marketing channel. The career field force has 50
branch offices throughout the United States and 15 branch offices in Canada,
with approximately 500 agents in the United States and 400 agents in Canada. In
contrast to independent agents, career agents have an exclusive arrangement
with, and only represent, the Company. In 2000, this segment accounted for
$129.4 million, or 58.9%, of the Company's net premiums earned. Approximately
36% of net premiums earned for this segment were generated by the Canadian
operations. The Career Agency system issued $22.3 million of new business in
2000 compared to $22.0 million in 1999.
Special Markets
Through its own operating history and through acquisitions, Universal
American has accumulated various lines of business that are no longer part of
its core focus. These products include traditional and interest-sensitive life
insurance, group life insurance, individual medical and other accident and
health insurance, some of which continue to be sold in limited amounts through
general agency relationships. Management believes that these lines of business
should be actively managed for profit or disposed of through sale or
cancellation. In December 2000, the Company decided to exit the Individual Major
Medical business, which has accounted for the majority of the production of new
business in this segment. In 2000 and 1999 this segment had $38.3 million and
$27.3 million, respectively, or 17.4% and 23.6%, respectively, of net premiums
earned.
PRODUCTS
The Senior Market Brokerage segment focuses on the senior market
products (Medicare Supplement, long term care and final expense life insurance),
while the Career Agency segment focuses on fixed benefit disability income, with
an increased concentration focus on senior market products. The products
described below are these currently marketed by the company.
SENIOR MARKET PRODUCTS - SUPPLEMENTAL HEALTH AND LONG-TERM CARE
Universal American's core supplemental health insurance products
include various Medicare Supplement and Medicare Select plans. Additionally, the
Company offers various long term care plans consisting of fully integrated
plans, nursing home only plans and stand alone home health care plans. Typically
these products are guaranteed renewable for the lifetime of the policyholder,
which means that the Company cannot cancel the policy, but can increase premium
rates on existing and future policies issued based upon the Company's claims
actual experience. These rate increases are applied on a uniform,
nondiscriminatory state by state basis and are subject to state regulatory
approval and federal and state loss-ratio requirements.
Medicare Supplement/Select
The Medicare Supplement policies offered by the Insurance
Subsidiaries are primarily on standardized plans A, B, C, D and F. These
policies provide supplemental coverage for many of the
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medical expenses that the Medicare program does not cover, such as deductibles,
coinsurance and specified losses that exceed the federal program's maximum
benefits. The Company also sells Medicare Select policies in some areas, in
conjunction with hospitals that contract with the insurer to waive the Medicare
Part A deductible. The Company monitors the claim experience on its Medicare
Supplement and Select products and, when necessary, applies for rate increases
in the states in which the products are sold. Medicare Supplement and Medicare
Select issued premium amounted to $78.2 million and $30.8 million in 2000 and
1999, respectively, produced through the general agency system. In 2001, the
career agency system will also begin to sell these products.
Long Term Care
The Company's long term care plans provide coverage, within selected
limits by the policyholders, for nursing home and assisted living care only
coverage, home health care only coverage, or an integrated combination of such
coverage. The nursing home and assisted living care products are subject to
daily fixed dollar maximum limits, have various elimination periods which must
be satisfied by the insureds and have maximum lifetime benefits or benefit
periods. The home health care products cover care needed in the insured's home,
are subject to daily or weekly maximum dollar benefits and an overall lifetime
maximum benefit or maximum benefit period. A new integrated long-term care
product, combining nursing home, assisted living and home health care benefits
was introduced in late 1999 in several states and the Company has developed a
new nursing home-assisted living product with optional home health care riders
which will be introduced in 2001. Issued premium for these long term care
products in 2000 and 1999 amounted to $4.6 million and $4.1 million,
respectively, produced through the general agency system. In 2000, the career
agents began to sell a new generation of long term care products and produced
$3.9 million of new premium.
SENIOR MARKET PRODUCTS - FINAL EXPENSE LIFE INSURANCE AND ANNUITIES
Final Expense Life
This series of low-face amount, simplified issue whole life products
is sold by both the Senior Market Brokerage segment and the Career Agents.
Issued premium of $2.0 million and $1.0 million in 2000 and 1999, respectively,
was produced through the general agency system. Additionally, in late 2000, the
career agents began to sell Final Expense life insurance and produced $0.6
million of new premium.
Annuities
The Company markets Single and Flexible Premium Deferred Annuities
primarily focusing on the senior and retirement markets. The Company's currently
marketed annuity products have a minimum guaranteed interest rate ranging from
3.0% from 4.0% annually and current credited interest rates that range from 3.0%
to 7.3%, with the Company having the right to change the crediting rates. In
exercising its right to change the interest rate, the Company takes into account
the current interest rate environment, the profitability of its annuity business
and its relative competitive position. The general agency system produced $4.4
million and $6.3 million of annuities in 2000 and 1999, respectively.
Additionally, in late 2000, the Career Agency system produced $3.0 million of
annuity premium.
CAREER AGENCY PRODUCTS
Fixed Benefit Accident and Health
Fixed benefit accident and health products provide coverage
for three principal types of benefits: (i) fixed periodic payments to an insured
who becomes disabled and unable to work because of an accident and/or sickness
("disability income"), (ii) fixed periodic payments to an insured who
becomes hospitalized ("hospital income") and (iii) fixed single payments that
vary in amount generally for specified surgical or diagnostic procedures
("surgical"). Because the benefits are fixed in amount at the time of policy
issuance and are not intended to provide full reimbursement for medical and
hospital expenses,
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payment amounts are not affected by inflation or the rising cost of health care
services. The disability income product is typically sold to individuals in
amounts which, when combined with other similar coverages, do not provide
monthly benefits in excess of $2,000, or 50% of the insured's monthly income if
less. The hospital income product is typically sold to individuals to provide
the insured with a means of paying supplemental expenses during a
hospitalization stay and provides benefits of not more than $250 per day ($1,000
if the insured is in intensive care). The surgical product is typically sold as
a rider to an accident policy and the Company's practice is to provide benefits
of not more than $5,000 ($2,500 if the procedure is performed on an out-patient
basis).
Life Insurance
In late 2000, the Career Agents began to sell term life insurance
that provides a minimum coverage of $50,000 for a ten-year period (offered to
individuals ages 18 through 60) or a twenty-year period (offered to individuals
ages 18 through 50) as specified in the policy. Premium rates vary according to
age and sex and these policies are fully underwritten. No cash values are
accumulated in this policy and the policy can be renewed for a new term on any
expiration date, except for the final expiration date, without evidence of
insurability. Issued premium for 2000 amounted to $0.5 million.
BUSINESS IN FORCE
As of December 31, 2000, the Company had $485.6 million of annualized
premium in force and $223.7 million in account values generated by 762,000
policyholders.
The Company's growth in direct, acquired and assumed annualized
premium in force, exclusive of the portion of premiums on interest-sensitive
products, is shown in the following tables as of December 31, 2000, 1999 and
1998.
ANNUALIZED PREMIUM IN FORCE As of December 31,
-------------------------------
2000 1999 (1) 1998
-------------------------------
(In thousands)
SENIOR MARKET BROKERAGE
Accident & Health
Medicare Supplement and Select (written) $115,217 $ 49,962 $ 18,811
Medicare Supplement Acquired 149,200 154,617 66,317
Long Term Care Acquired 20,395 16,167 7,658
Hospital Indemnity 1,304 1,456 1,722
------- ------- ------
TOTAL ACCIDENT & HEALTH 286,116 222,202 94,508
------- ------- ------
Life
Asset Enhancer (3) 6,357 7,248 7,333
Final Expense Life 3,984 2,479 2,051
------- ------- ------
TOTAL LIFE 10,341 9,727 9,384
------- ------- ------
TOTAL SENIOR MARKET BROKERAGE 296,457 231,929 103,892
------- ------- ------
CAREER AGENCY
Accident & Health
Disability Income 71,248 75,080 --
Hospital 16,635 21,614 --
Long Term Care Written 3,900 -- --
Long Term Care Acquired 9,680 12,011 --
Other Accident & Health 13,290 10,440 --
Surgical 5,180 5,600 --
------- ------- ------
TOTAL ACCIDENT & HEALTH 119,933 124,745 --
LIFE (3) 13,234 15,800 --
------- ------- ------
TOTAL CAREER AGENCY 133,167 140,545 --
SPECIAL MARKETS
Accident & Health
Individual Medical (1) (4) 31,422 45,442 18,745
Other Accident & Health (2) 8,640 9,518 8,018
------- ------- ------
TOTAL ACCIDENT & HEALTH 40,062 54,960 26,763
------- ------- ------
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Life
Group Life 3,444 3,542 3,520
Brokerage (3) 12,487 7,311 8,294
------- ------- ------
TOTAL LIFE 15,931 10,853 11,814
------- ------- ------
TOTAL SPECIAL MARKETS 55,993 65,813 38,577
CONSOLIDATED
ACCIDENT & HEALTH 446,111 401,907 121,271
LIFE 39,506 36,380 21,198
------- ------- ------
TOTAL CONSOLIDATED $485,617 $438,287 $142,469
======== ======== ========
(1) 1999 includes $96,739 and $14,234 of Medicare Supplement
and individual medical insurance premium, respectively,
acquired in connection with the 1999 Acquisition.
(2) Business acquired by the Company that is not actively
marketed.
(3) Included in the amounts shown are premiums for
interest-sensitive products. These amounts represent the
portion of premium applied to the cost of insurance (i.e.
deposit premiums have been excluded).
(4) In the fourth quarter of 2000, the Company decided to exit
its under-performing individual major medical business to
the extent possible. The Company believes it will be able
to cancel, by the end of 2002, approximately $27 million
of the $31 million in annualized premium in force on
December 31, 2000.
ACCOUNT VALUES ON INTEREST-SENSITIVE PRODUCTS
The following table shows all outstanding account values for
interest-sensitive products as of December 31, 2000, 1999 and 1998. For these
products, the Company earns income on the spread between investment income on
the Company's invested assets and interest credited to these account balances.
As of December 31,
---------------------------------------
2000 1999 (1) 1998
---------------------------------------
(In thousands)
Annuities $ 90,951 $107,169 $ 89,262
Universal Life 98,124 97,845 36,543
Asset Enhancer 34,642 33,651 29,081
------ ------ ------
Grand Total $223,717 $238,665 $154,886
======== ======== ========
- -------------------------
(1) 1999 figures include $20.2 million and $60.9 million of Annuity and
Universal Life account values, respectively, acquired in connection
with the 1999 Acquisition.
GEOGRAPHICAL DISTRIBUTION OF PREMIUM
The Company, through its nine Insurance Subsidiaries, is licensed to
market its product in all fifty states and in all the provinces of Canada. The
following table shows (by direct cash premium collected as reported to the
regulatory authorities for the full year of 2000) the geographical distribution
of premiums collected:
State/Region Collected % Total
Premium
(In thousands)
Florida $85,412 18.4%
Texas 55,563 11.9%
Canada 47,861 10.3%
New York 30,389 6.5%
Indiana 26,889 5.8%
Wisconsin 24,529 5.3%
Ohio 19,437 4.2%
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Pennsylvania 17,074 3.7%
North Carolina 11,207 2.4%
Georgia 10,585 2.3%
Missouri 9,696 2.1%
Mississippi 9,530 2.0%
California 8,739 1.9%
------- ----
Subtotal 356,911 76.7%
All other 108,414 23.3%
------- ----
Total $465,325 100.0%
======== =====
In 2000, no agent produced as much as 5% of the Company's accident &
health insurance premiums, life insurance or annuity premiums collected.
REINSURANCE
The Company has entered into reinsurance arrangements with
unaffiliated insurance companies to limit exposure on individual claims, to
support the increased volume of new business generated by the Senior Market
brokerage segment and to limit or eliminate risk on non-core or under-performing
blocks of business. The table below details the annualized premium in force on a
gross, ceded and net basis as of December 31, 2000.
ANNUALIZED PREMIUM IN FORCE As of December 31, 2000
-------------------------------------------------------
Gross Ceded Net % Retained
-------------------------------------------------------
(In thousands)
SENIOR MARKET BROKERAGE
Accident & Health
Medicare Supplement and Select Written $115,217 $ 81,230 $ 33,987 29%
Medicare Supplement Acquired 149,200 141,270 7,930 5%
Long Term Care 20,395 7,617 12,778 63%
Hospital Indemnity 1,304 326 978 75%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 286,116 230,443 55,673 19%
------- ------- ------ --
Life
Asset Enhancer 6,357 1,817 4,540 71%
Final Expense Life 3,984 1,876 2,108 53%
------- ------- ------ --
TOTAL LIFE 10,341 3,693 6,648 64%
------- ------- ------ --
TOTAL SENIOR MARKET BROKERAGE 296,457 234,136 62,321 21%
------- ------- ------ --
CAREER AGENCY
Accident & Health
Disability Income 71,248 -- 71,248 100%
Hospital 16,635 -- 16,635 100%
Long Term Care 13,580 -- 13,580 100%
Other Accident & Health 13,290 -- 13,290 100%
Surgical 5,180 -- 5,180 100%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 119,933 -- 119,933 100%
------- ------- ------ --
LIFE (3) 13,234 -- 13,234 100%
------- ------- ------ --
TOTAL CAREER AGENCY 133,167 -- 133,167 100%
------- ------- ------ --
SPECIAL MARKETS
Accident & Health
Individual Medical 31,422 9,551 21,871 70%
Other Accident & Health 8,640 6,372 2,268 26%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 40,062 15,923 24,139 60%
------- ------- ------ --
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Life
Group Life 3,444 -- 3,444 100%
Traditional 12,487 1,263 11,224 90%
------- ------- ------ --
TOTAL LIFE 15,931 1,263 14,668 92%
------- ------- ------ --
TOTAL SPECIAL MARKETS 55,993 17,186 38,807 69%
------- ------- ------ --
CONSOLIDATED
ACCIDENT & HEALTH 446,111 246,366 199,745 45%
LIFE 39,506 4,956 34,550 87%
------- ------- ------ --
TOTAL CONSOLIDATED $485,617 $251,322 $234,295 48%
======== ======== ======== ==
The Company is contingently liable to pay claims in the unlikely
event that a reinsurer fails to meet its obligations under the reinsurance
agreement. The Company's primary reinsurers are currently rated A+ (Superior)
and A (Excellent) by A.M. Best. To the Company's knowledge, none of the
Company's reinsurers have been unable to pay any policy claims on any reinsured
business.
In addition to the reinsurance agreements discussed below by segment,
the Company reinsures portions of the coverage of its life insurance products to
unaffiliated insurance companies under various reinsurance agreements, which
allows the Company to write policies in amounts larger than the risk it is
willing to retain on any one life. The mortality risk retention limit on each
policy varies generally between $25,000 and $250,000.
The reinsurance agreements are subject to cancellation on 90 days
notice as to future business, but policies reinsured prior to such cancellation
remain reinsured as long as they remain in force. Management believes that if
its reinsurance agreements were canceled it would be able to obtain other
reinsurance arrangements on satisfactory terms to enable it to continue writing
new business.
Senior Market Brokerage
The Company reinsures most of its senior market brokerage products to
unaffiliated third party reinsurers under various quota share agreements.
Medicare Supplement premium currently being issued is reinsured under quota
share reinsurance agreements ranging between 50% and 75% based upon the
geographic distribution. The Company has also acquired various blocks of
Medicare Supplement premium, which are reinsured under quota share reinsurance
agreements ranging from 75% to 100%. The Company's long term care products
currently produced are reinsured at percentages averaging 50%, while the
long term care acquired with Union Bankers is 100% retained. The Final Expense
Life insurance products currently being issued are reinsured on a 50% quota
share basis. Under these reinsurance agreements, the Company reinsures the
premiums earned, claims incurred and commissions on a pro rata basis and
receives additional expense allowances for policy issue, administration and
premium taxes.
Career Agency
Currently, the Company retains 100% of all life and health business
issued by the career agency distribution other than the long term care and
Medicare Supplement products, which products are reinsured on a 50% quota share
basis.
Special Markets
The Company has 50% quota share and "excess of loss" reinsurance
agreements with unaffiliated insurance companies on its medical insurance
policies to reduce the liability on individual risks to amounts ranging between
$50,000 and $250,000. Under these treaties, the Company performs all the
underwriting and administration and receives various allowances for commission
and expenses on the ceded portion of the premium. The major medical business
acquired with Union Bankers is 100%
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retained but has an excess of loss reinsurance agreement limiting the liability
on an individual risk to $250,000. Most of this business is in the process of
being cancelled (see Cancellation of Major Medical Business above).
In conjunction with the 1999 Acquisition, Peninsular entered into a
coinsurance agreement with Occidental Life Insurance Company of North Carolina
("Occidental"), a former affiliate, to cede 100% of its direct business
(primarily life and annuity business). Currently, A.M. Best rates Occidental
B++. It is anticipated that this coinsurance agreement will be replaced with a
full assumption agreement which will effectively transfer the business to
Occidental. As of December 31, 2000, approximately 52% of the business had been
transferred.
Administration of Reinsured Blocks of Business
The Company generally retains the administration for the reinsured
blocks of business, including underwriting, issue, policy maintenance, rate
management and claims adjudication and payment. In addition to reimbursement for
commissions and premium taxes on the reinsured business, the Company also
receives allowances as compensation for its administration.
COMPETITION
The life and accident and health insurance industry in the United
States is highly competitive. The Company competes with other insurance and
financial services companies, including large multi-line organizations, both in
connection with the sale of insurance and asset accumulation products and in
acquiring blocks of business. Many of these organizations have been in business
for a longer period of time and have substantially greater capital and surplus,
larger and more diversified portfolios of life and health insurance policies,
larger agency sales operations and higher ratings. In addition, it has become
increasingly difficult for mid-size companies to compete effectively with their
larger competitors for insurance product sales in part as a result of heightened
consumer and agent awareness of the financial size of companies.
The Company believes it meets these competitive pressures by offering
a high level of service and accessibility to its field force and by developing
specialized products and marketing approaches. The Company also believes its
policies and premium rates are generally competitive with those offered by other
companies selling similar types of products in the same jurisdictions.
Increased public and regulatory concerns regarding the financial
stability of insurance companies have resulted in policyholders placing greater
emphasis upon company ratings and have created some measure of competitive
advantage for insurance carriers with higher ratings. A. M. Best & Co. is
considered to be a leading insurance company rating agency. In evaluating a
company's financial and operating performance, A.M. Best reviews profitability,
leverage and liquidity as well as the quality of the book of business, the
adequacy and soundness of reinsurance programs, the quality and estimated market
value of assets, reserve adequacy and the experience and competence of
management. A.M. Best's ratings are based upon factors relevant to
policyholders, agents, insurance brokers and intermediaries and are not directed
to the protection of investors. A. M. Best has assigned a "B+" rating to
American Pioneer, American Progressive, Constitution Life, Pennsylvania Life and
Union Bankers. This rating means that in A. M. Best's opinion, these companies
have demonstrated "very good" overall performance when compared to standards it
has established and have a "good" ability to meet their obligations to
policyholders and are in the "Secure" category of all companies rated by A. M.
Best. A. M. Best has rated Peninsular Life "FPR5", which means the company has a
"good" ability to meet its obligations to policyholders, based primarily on a
quantitative evaluation of Peninsular Life's financial strength and operating
performance. A. M. Best does not rate the other Insurance Subsidiaries.
The Insurance Subsidiaries are not known to be currently rated by the
Standard & Poors, Moody's or Duff and Phelps rating organizations. Although a
higher rating by A.M. Best or another insurance rating organization could have a
favorable effect on the Company's business, management believes that its
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marketing has enabled, and will continue to enable, the Insurance Subsidiaries
to compete effectively.
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based, in part, on
assumptions about expected mortality and morbidity experience. The Company has
adopted and follows detailed uniform underwriting procedures designed to assess
and quantify certain insurance risks before issuing individual life insurance,
certain health insurance policies and certain annuity policies to individuals.
These procedures are generally based on industry practices, reinsurer
underwriting manuals and the Company's prior underwriting experience. To
implement these procedures, the Insurance Subsidiaries employ an experienced
professional underwriting staff.
Applications for insurance are reviewed on the basis of the answers
to the application questions. Where appropriate to the type and amount of
insurance applied for and the applicant's age and medical history, additional
information is required, such as medical examinations, statements from doctors
who have treated the applicant in the past and, where indicated, special medical
tests. If deemed necessary, the Company uses investigative services to
supplement and substantiate information. For certain coverages, the Company may
verify information with the applicant by telephone. After reviewing the
information collected, the Company either issues the policy as applied for on a
standard basis; issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain
conditions, either permanently or for a period of time, or rejects the
application. For certain of its coverages, the Company has adopted simplified
policy issue procedures in which the applicant submits an application for
coverage typically containing only a few health-related questions instead of a
complete medical history. In New York and some other states, certain of the
Company's products, including Medicare Supplement, are subject to "Community
Rating" laws that severely limit or prevent underwriting of individual
applications. See "Regulation - Health Care Reform".
RESERVES
In accordance with applicable insurance regulations, the Company has
established, and carries as liabilities in its statutory financial statements,
actuarially determined reserves that are calculated to satisfy its policy and
contract obligations. Reserves, together with premiums to be received on
outstanding policies and contracts and interest thereon at certain assumed
rates, are calculated to be sufficient to satisfy policy and contract
obligations. The actuarial factors used in determining such reserves are based
on statutorily prescribed mortality tables and interest rates. Reserves are also
maintained for unearned premiums, for premium deposits, for claims that have
been reported and are in the process of being paid or contested and for
management's estimate for claims that have been incurred but have not yet been
reported.
The reserves reflected in the Company's consolidated financial
statements are calculated in accordance with generally accepted accounting
principles ("GAAP"). These reserves are determined based upon the Company's best
estimates of mortality and morbidity, persistency, expenses and investment
income. The Company uses the net level premium method for all
non-interest-sensitive products and the retrospective deposit method for
interest-sensitive products. GAAP reserves differ from statutory reserves due to
the use of different assumptions regarding mortality and morbidity, interest
rates and the introduction of lapse assumptions into the GAAP reserve
calculation. (See Notes 2e and 2f to the Notes to the Consolidated Financial
Statements).
INVESTMENTS
The following table summarizes the Company's investment portfolio as
of December 31, 2000 and 1999:
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INVESTMENT PORTFOLIO
December 31, 2000 December 31,1999
Carrying Percent of Carrying Percent of
Value Total Value Total
(Fair Value) Carrying (Fair Value) Carrying
------------ -------- ------------ --------
(In thousands) Value Value
Fixed Maturity Securities:
U.S. Government and
Government agencies (1) $ 34,734 4.21% $ 63,391 7.80%
Mortgage backed (1) 172,857 20.95% 153,316 18.87%
Asset backed 85,547 10.37% 64,496 7.94%
Investment grade corporates 436,677 52.94% 428,317 52.73%
Non-investment grade corporates 21,923 2.66% 8,040 0.99%
------ ---- ----- ----
Total fixed maturity securities 751,738 91.13% 717,560 88.33%
Cash and cash equivalents 40,250 4.88% 58,753 7.23%
Other Investments:
Policy loans 25,077 3.04% 25,640 3.16%
Equity securities 3,547 .43% 4,838 0.60%
Mortgage loans 2,281 .28% 2,743 0.34%
Other invested assets 2,037 .25% 2,763 0.34%
------ ---- ----- ----
Total invested assets $824,930 100.00% $812,297 100.00%
======== ====== ======== ======
- --------------
(1) US Government and government agencies include GNMA Mortgage backed
securities.
The following table shows the distribution of the contractual
maturities of the Company's portfolio of fixed maturity securities by carrying
value as of December 31, 2000. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties:
CONTRACTUAL MATURITIES OF FIXED MATURITY SECURITIES
Percent of
Carrying Total Fixed
Available for Sale Value Maturities
------------------ ------------------ ------------------
(In thousands)
Due in 1 year or less $25,627 3.41%
Due after 1 year through 5 years 148,470 19.75%
Due after 5 years through 10 years 215,840 28.71%
Due after 10 years 100,521 13.37%
Asset backed securities 85,547 11.38%
Mortgage backed securities 175,733 23.38%
------- -----
$751,738 100.00%
======== ======
The following table shows the distribution by carrying value (which
is the estimate of fair value) of the Company's fixed maturity securities
portfolio according to the ratings assigned by Standard & Poor's Corporation, as
of December 31, 2000 and 1999:
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DISTRIBUTION OF FIXED MATURITY SECURITIES BY RATING
December 31, 2000 December 31, 1999
(In thousands)
% of
Carrying % of Carrying
Standard & Value Total Value Total
Poor's (Estimated Fixed (Estimated Fixed
Rating Fair Value) Investment Fair Value) Investment
AAA $285,274 37.95% $260,911 36.36%
AA 105,749 14.07% 94,482 13.17%
A 239,420 31.85% 257,702 35.91%
BBB 99,372 13.22% 96,425 13.44%
BB 7,965 1.06% 5,390 0.75%
B 12,766 1.70% 2,255 0.31%
CCC 799 .11% 395 0.06%
CC 88 .01% 0 0%
D 305 .04% 0 0%
-------- ------ -------- ------
Total $751,738 100.00% $717,560 100.00%
======== ====== ======== ======
At December 31, 2000 and 1999, 97.1% and 98.9%, respectively, of the
Company's fixed maturity investments were investment grade fixed maturity
securities (i.e., those rated "BBB-" or higher by Standard & Poor's Corporation
or "Baa3" or higher by Moody's Investors Service). This included approximately
$172.8 million, at December 31, 2000 and $153.3 million, at December 31, 1999,
of collateralized mortgage obligations secured by residential mortgages,
representing approximately 23% and 26% of the Company's fixed maturity portfolio
at December 31, 2000 and 1999, respectively. Certain classes of mortgage-backed
securities are subject to significant prepayment risk, because in periods of
declining interest rates, mortgages may be repaid more rapidly than scheduled,
as individuals refinance higher rate mortgages to take advantage of the lower
rates. As a result, holders of mortgage-backed securities may receive higher
prepayments on their investments, which they may not be able to reinvest at an
interest rate comparable to the rate paid on such mortgage-backed securities.
At December 31, 2000 and 1999, less than investment grade fixed
maturity securities had aggregate carrying values (held at fair value) of $21.9
million and $8.0 million, respectively, amounting to 2.9% and 1.1%,
respectively, of total investments and 1.8% and 0.7%, respectively, of total
assets. The Company's holdings of less than investment grade corporate fixed
maturity securities are diversified and the largest investment in any one such
security at December 31, 2000 was $5.9 million, which was less than 0.5% of
total assets. The Company wrote down the value of certain securities, considered
to have been subject to an-other-than temporary decline in value, by $0.5
million and $0.6 million in 2000 and 1999, which was included in net realized
gains (losses) on investments in the consolidated statements of operations.
INVESTMENT INCOME
Investment income is an important part of the Company's total
revenues and profitability. Management cannot predict the impact that changes in
future interest rates will have on the Company's financial statements.
The following table shows the investment results of the Company's
total invested asset portfolio, for the three years ended December 31, 2000:
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INVESTMENT RESULTS
Years Ended December 31,
2000 1999 1998
(In thousands)
Total cash and invested assets, end of period $ 824,930 $ 812,297 $ 164,674
Net investment income $ 56,945 $ 29,313 $ 10,721
Yield on average cash and investments 6.88% 6.79% 6.67%
Net realized investment gains (losses) on the sale
of securities (including other than temporary
declines in market value) $ 146 $ (241) $ 256
REGULATION
General
The Insurance Subsidiaries, like other insurance companies, are
subject to the laws, regulations and supervision of the states in which they are
domiciled (New York in the case of American Progressive, Florida in the case of
American Pioneer and Peninsular Life, Pennsylvania in the case of Pennsylvania
Life, Texas in the case of American Exchange, Constitution Life, Marquette and
Union Bankers and provincial and federal law of Canada in the case of PennCorp
Life of Canada). Effective December 21, 2000, Peninsular Life was
re-domesticated to Florida from North Carolina. This was done primarily to
reflect the move of its home office to Orlando, Florida, as well as its change
in ownership from American Exchange to American Pioneer. Each company is also
subject to regulation and supervision in the Insurance Department in each of the
other states in which they are admitted and authorized to transact business. The
purpose of such laws and regulations is primarily to provide safeguards for
policyholders rather than to protect the interest of shareholders.
Such regulations and supervision by the Insurance Departments extend,
among other things, to the granting and revocation of licenses to transact
business, the form and content of policies which may be offered, the setting of
premium rates on health insurance policy forms, establishment of reserve and
capitalization requirements, permissible investments, the form and content of
statutorily-mandated financial statements, and the declaration and payment of
dividends.
Every insurance company that is a member of an "insurance holding
company system" is generally required to register as such with the insurance
regulatory authorities in each state in which it is authorized to do business
and file periodic reports concerning its relationships with the insurance
holding company. Material transactions between registered insurance companies
and members of the holding company system are required to be "fair and
reasonable" and in some cases are subject to administrative approval, and the
books, accounts and records of each party are required to be so maintained as to
clearly and accurately disclose the precise nature and details of the
transactions.
Each Insurance Subsidiary is required to file detailed
reports with the insurance department of each state in which it is licensed to
conduct business and its books and records are subject to examination by each
such insurance department. In accordance with the insurance codes of their
domiciliary states and the rules and practices of the National Association of
Insurance Commissioners ("NAIC"), the Insurance Subsidiaries are examined
periodically by examiners of the companies' domiciliary states and by
representatives (on an "association" or "zone" basis) of the other states in
which they are licensed to do business. The status of completed examinations and
examinations in progress is presented below:
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Completed Examinations:
State Year
Conducting Years Exam Report
Company Exam Examined Completed Status
- ------- ---- -------- --------- ------
American Progressive New York 1995-97 1999 Final
America Pioneer Florida 1995 1997 Final
American Exchange Texas 1997 1999 Final
Peninsular North Carolina 1993-95 1997 Final
Pennsylvania Life Pennsylvania 1994-96 1998 Final
Union Bankers Texas 1995-97 1999 Final
Constitution Life Texas 1995-97 1999 Final
Marquette Texas 1995-97 1999 Final
There are no material issues with respect to the completed examinations which
would have an impact on the financial position of the respective companies.
Examinations in Progress:
State Years Expected
Conducting Being Completion
Company Exam Examined Date
America Pioneer Florida 1996-99 June 2001
American Progressive New York 1998-2000 December 2001
Pennsylvania Life Pennsylvania 1997-2000 December 2001
Management does not believe that there are any material issues with respect to
the examinations in progress which would have an impact on the financial
position of the respective companies.
Many states require deposits of assets for the protection of
policyholders either in those states or for all policyholders. At December 31,
2000 and 1999, securities totaling $33.1 million and $32.5 million, respectively
(approximately 4.2% and 4.3%, respectively, of the carrying value of the
Company's total investments), were on deposit with various state treasurers or
custodians. Such deposits must consist of securities that comply with the
standards established by the particular state.
Codification of Statutory Accounting Practices
In 1998, the NAIC approved a codification of statutory accounting
principles, effective January 1, 2001, which will serve as a comprehensive and
standardized guide to statutory accounting principles. The adoption of the
codification will change, to some extent, the accounting practices that the
Company's Insurance Subsidiaries use to prepare their statutory financial
statements. The Company does not believe that such changes will have a material
adverse impact on the reported statutory financial condition of any such
subsidiaries.
Other Insurance Regulatory Changes
The NAIC and state insurance regulators have recently become involved
in a process of re-examining existing laws and regulations and their application
to insurance companies. This re-examination has focused on insurance company
investment and solvency issues, risk-based capital guidelines, assumption
reinsurance, interpretations of existing laws, the development of new laws, the
interpretation of nonstatutory guidelines, and the circumstances under which
dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws
on specific topics such as holding company regulations and the definition of
extraordinary dividends. Furthermore, while the Federal government currently
does not directly regulate the insurance business, Federal legislation and
administrative policies in a number of areas, such as employee benefits
regulation, age, sex and disability-based discrimination, financial services
regulation and Federal taxation, can significantly affect the insurance
business. It is not possible to predict the future impact of changing regulation
on the operations of the Company and its Insurance Subsidiaries.
Since 1993 New York State has required that all health insurance sold
to individuals and groups
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with less than 50 employees, be offered on an open enrollment and community
rated basis. Such insurance may continue to be sold to groups with more than 50
employees on an underwritten basis, with premium set to reflect expected or
actual results. The community rating aspect of the law prohibits the use of age,
sex, health or occupational factors in rating and requires that the same average
rate be used for all persons with the same policy residing in the same location.
The Medicare Supplement policies actively marketed by American Progressive in
New York State and some of its in force business is subject to the community
rating rules. The extension of such legislation to Florida, Texas and other
states where significant medically underwritten health insurance is offered,
might cause a reconsideration of the Company's existing health care coverage
offerings.
Dividend and Distribution Restrictions
Under the New York State Insurance Law, the declaration or payment of
a dividend by American Progressive requires the approval of the New York
Superintendent of Insurance, who, as a matter of present policy, would not
approve such payment until American Progressive had generated sufficient
statutory profits to offset its entire negative unassigned surplus, which was
approximately $8.2 million at December 31, 2000.
Under Pennsylvania and Texas insurance law, a life insurer may pay
dividends or make distributions from accumulated earning without the prior
approval of the Insurance Department, provided they do not exceed the greater of
(i) 10% of the insurer's surplus as to policyholders as of the preceding
December 31st; or (ii) the insurer's net gain from operations for the
immediately preceding calendar year.
Under current Florida State insurance law, a life insurer may pay a
dividend or make a distribution without the prior written approval of the
department when:
a) the dividend is paid from that portion of the accumulated
and available surplus of the Company as is derived from
the net operating profits of its business and its net
realized capital gains;
b) the dividend is no more than the greater of (i) 10% of the
insurer's surplus as to policyholders derived from net
operating profits on its business and net realized capital
gains; or (ii) the insurer's entire net operating profits
and realized net capital gains derived during the
immediately preceding calendar year;
c) the insurer will have surplus as to policyholders equal to
or exceeding 115% of the minimum required statutory
surplus as to policyholders after the dividend or
distribution is made; and
d) the insurer has filed notice with the department at least
10 business days prior to the dividend payment or
distribution.
Under current Canadian law, a life insurer may pay a dividend after
such dividend declaration has been approved by its board of directors and upon
at least 10 days prior notification to the Superintendent of Financial
Institutions. In considering approval of a dividend, the board of directors must
consider whether the payment of such dividend would be in contravention of the
Insurance Companies Act of Canada.
During the year ended December 31, 2000, Pennsylvania Life and Union
Bankers paid ordinary dividends to American Exchange of $2.9 million and $2.0
million, respectively. Additionally, Peninsular Life paid an extraordinary
dividend of $1.5 million to Universal American in 2000.
Based on the current dividend regulations of the respective states,
Pennsylvania Life and Union Bankers would be able to pay ordinary dividends of
approximately $12.1 million and $1.4 million respectively, to American Exchange
without prior approval from the respective departments. Additionally,
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Peninsular Life would be able to pay ordinary dividends of approximately $1.2
million to American Pioneer without prior approval from the Florida Insurance
Department.
Risk-Based Capital Requirements
The NAIC's risk-based capital ("RBC") requirements for insurance
companies take into account asset risks, interest rate risks, mortality and
morbidity risks and other relevant risks with respect to the insurer's business
and specify varying degrees of regulatory action to occur to the extent that an
insurer does not meet the specified RBC thresholds, with increasing degrees of
regulatory scrutiny or intervention provided for companies in categories of
lesser RBC compliance. The Company believes that its Insurance Subsidiaries are
adequately capitalized under the RBC requirements and that the thresholds will
not have any significant regulatory effect on the Company. However, should the
Insurance Subsidiaries' RBC position decline in the future, the Insurance
Subsidiaries' continued ability to pay dividends and the degree of regulatory
supervision or control to which they are subjected might be affected.
Guaranty Association Assessments
The Company's Insurance Subsidiaries can be required, under solvency
or guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of unaffiliated insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
solvency or guaranty laws if they would threaten an insurer's financial strength
and, in most instances, may be offset against future state premium taxes. None
of the Insurance Subsidiaries has ever incurred any significant costs of this
nature. The likelihood and amount of any other future assessments are now
unknown and are beyond the control of the Company.
Health Care Reform
From time to time, numerous proposals have been introduced in
Congress and the state legislatures to reform the current health care system.
Proposals have included, among other things, employer-based insurance systems,
subsidized premiums for lower income people, "managed competition" among health
plans, programs to regulate policy availability, affordability of public and
private programs and expansion of Medicare to provide prescription drug benefits
and coverage to persons under age 65. Changes in health care policy could
significantly affect the Company's health insurance business.
In 1996, Congress enacted the Kennedy-Kassenbaum Act, which, among
other changes, restricts the ability of insurers to utilize medical underwriting
and pre-existing condition provisions in certain health insurance policies
issued to persons who were previously insured under qualifying policies. These
changes, which became effective in stages, may have an effect on some of the
Company's policies.
Whether or not Congress passes any further health reform measures in
the foreseeable future cannot be determined at the present time; however, it is
likely that health reform will continue to reappear on the legislative agenda in
the future. Such additional healthcare reform proposals also could require
standardization of major medical or long term care coverages, impose mandated or
target loss ratios or rate regulation, require the use of community rating or
other means that further limit the ability of insurers to differentiate among
risks, or mandate utilization review or other managed care concepts to determine
what benefits would be paid by insurers. These or other proposals could increase
or decrease the level of competition among health insurers. In addition, changes
could be made in Medicare that could necessitate revisions in the Company's
Medicare Supplement products. Other potential initiatives, designed to tax
insurance premiums or shift medical care costs from government to private
insurers, could have effects on the Company's business, some of them adverse.
The Company is unable to predict what changes to the country's health care
system will be enacted, if any, or their effects on the Company's business. (See
"Regulation").
Other Possible Changes in Legislation
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Since insurance is a regulated business, with a high public profile,
it is always possible that legislation may be enacted which would have an
adverse effect on the Company's business.
A portion of the Company's insurance business is the sale of deferred
annuities and certain life insurance products, which are attractive to
purchasers in part because policyholders generally are not subject to federal
income tax on increases in the value of an annuity or life insurance contract
until some form of distribution is made from the contract. From time to time,
Congress has considered proposals to reduce or eliminate the tax advantages of
annuities and life insurance, which, if enacted, might have an adverse effect on
the ability of the Company to sell the affected products in the future. The
Company is not aware that Congress is actively considering any legislation that
would reduce or eliminate the tax advantages of annuities or life insurance;
however, it is possible that the tax treatment of annuities or life insurance
could change by legislation or other means (for example, by Internal Revenue
Service regulations or judicial decisions).
Certain changes in insurance and tax laws and regulations could have
a material adverse effect on the operations of insurance companies. Specific
regulatory developments which could have a material adverse effect on the
operation of the insurance industry include, but are not limited to, the
potential repeal of the McCarran-Ferguson Act (which exempts insurance companies
from a variety of federal regulatory requirements), and adoption of laws, such
as those already in force in New York, limiting an insurer's ability to
medically underwrite and rate health insurance policies or to exclude
pre-existing conditions from coverage. In addition, the administration of such
regulations is vested in state agencies that have broad powers and are concerned
primarily with the protection of policyholders.
EMPLOYEES
At March 1, 2001, the Company employed approximately 790 employees,
none of whom are represented by a labor union. The Company considers its
relations with its employees to be satisfactory.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning the
Directors and Officers of the Company:
POSITION WITH THE COMPANY, PRESENT PRINCIPLE
OCCUPATION OR EMPLOYMENT AND PAST FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
-------------- ------- --------------------------------------------------------------------------
Richard A. Barasch 47 Director, Chairman of the Board (since December 1997), President and Chief
Executive Officer of the Company; Director and President of American
Progressive; and Chairman of the Board of all the other subsidiaries. Mr.
Barasch has been a director and executive officer of the Company since July
1988, President since April 1991 and Chief Executive Officer since June 15,
1995. He has held his positions with the Company's subsidiaries since their
acquisition or organization by the Company.
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Robert A. Waegelein, C.P.A. 40 Senior Vice President and Chief Financial Officer of the Company (since
October 1990) and of the Company's subsidiaries since they were acquired or
organized. Prior to that, Mr. Waegelein, a certified public accountant, was
employed by KPMG Peat Marwick LLP, the Company's then independent public
accountants, in positions of increasing responsibility, finally serving as
Senior Manager.
Gary W. Bryant, C.P.A. 51 Senior Vice President of the Company since June 15, 1995 and Chief Operating
Officer since June 7, 2000. President, Chief Executive Officer and Director
of American Pioneer since April 1983. President and a director of American
Exchange (since December 1997), Constitution Life, Marquette, Peninsular
Life and Union Bankers (since March 2000) and Chairman of the Board of AIAG
(since January 2000).
William E. Wehner, C.L.U. 57 President and Director of Pennsylvania Life since April 2000, Executive Vice
President and Chief Operating Officer of American Progressive since May
1991 and Senior Vice President and Chief Marketing Officer of American
Pioneer since November 1997. Mr. Wehner was employed for over twenty years
by Mutual Life Insurance Company of New York and its affiliates in
positions of increasing responsibility, finally serving as Vice President
for Group Insurance.
Bradley E. Cooper 34 Director of the Company since July 1999. Mr. Cooper is a Partner and
co-founder of Capital Z Financial Services Fund II L.P. ("Capital Z") which
owns 55.8% of the Company's outstanding stock. Prior to joining Capital Z,
Mr. Cooper served in similar roles at Insurance Partners, L.P. ("Insurance
Partners") and International Insurance Investors, L.P. Prior to the
formation of Insurance Partners, Mr. Cooper was a Vice President of
International Insurance Advisors, Inc. and was an investment banker in the
Financial Institutions Group at Salomon Brothers, Inc. Mr. Cooper currently
serves on the board of directors of Superior National Insurance Group,
Highlands Insurance Group, CERES Group, Inc., American Capital Access
Holdings, eStellarnet, Inc. and Inlumen, Inc.
Susan S. Fleming 30 Director of the Company since July 1999. Ms. Fleming is a Principal of
Capital Z. Prior to joining Capital Z, Ms. Fleming served as Vice President
of Insurance Partners and was an investment banker in the Mergers and
Acquisitions Financial Institutions Group at Morgan Stanley & Co. Ms.
Fleming currently serves on the Board of Directors of CERES Group, Inc.
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Mark M. Harmeling 48 Director of the Company since July 1990 and Director of American Progressive
since December 1992. Mr. Harmeling is Managing Director of TA Associates
Realty, a pension fund advisory firm. He was previously President of Bay
State Realty Advisors, a real estate management and development company.
Mr. Harmeling is also a Director of Rochester Shoetree Corporation (since
1988) and Applied Extrusion Technologies, Inc. (since 1987).
Bertram Harnett 77 Director of the Company and American Pioneer since June 1996 and from July
29, 1988 to February 9, 1989. Mr. Harnett is President of the law firm of
Harnett Lesnick & Ripps P.A., Boca Raton, Florida and its predecessors
since 1988 and a practicing lawyer since 1948. He is the author of
treatises on insurance law and is a former Justice of New York State
Supreme Court.
Patrick J. McLaughlin 42 Director of the Company since January 1995. Mr. McLaughlin has been a
Managing Director of Emerald Capital Group, Ltd., an asset management and
consulting firm specializing in the insurance industry, since April 1993.
Prior to that he was an Executive Vice President and Chief Investment
Officer of Life Partners Group, Inc. (April 1990 to April 1993), Managing
Director of Conning & Company (August 1989 to April 1990) and Senior Vice
President and Chief Investment Officer of ICH Corporation (March 1987 to
August 1989).
Robert A. Spass 45 Director of the Company since July 1999. Mr. Spass is a Partner and
co-founder of Capital Z. Prior to founding Capital Z, Mr. Spass was the
Managing Partner and co-founder of Insurance Partners. Prior to the
formation of Insurance Partners, Mr. Spass was President and CEO of
International Insurance Advisors Inc. Prior to that, Mr. Spass was a
Director of Investment Banking at Salomon Brothers and a Senior Manager for
Peat Marwick Main & Co. Mr. Spass serves on the board of directors of
Highlands Insurance Group, Superior National Insurance Group, CERES Group,
Inc., Kinexus, Aames Financial Corp. and USI Insurance Services Corp.
Richard Veed 48 Director of the Company since April 1997. Mr. Veed has been a Managing
Partner of AAM Investment Banking Group, Ltd. Since October 1993. Prior to
that, he was President of Guaranty Reassurance Corp. from September 1992 to
May 1993 and a Partner at Arthur Andersen & Co. from 1987 to August 1992.
He is also a Director of HomeVest Financial Group, Inc. and Wasatch Crest
Group, Inc.
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Robert F. Wright 75 Director of the Company since June 1998. Mr. Wright has been President of
Robert F. Wright Associates, Inc. since 1988. Prior to that Mr. Wright was
a senior partner of the public accounting firm of Arthur Andersen LLP from
1960 to 1988. Mr. Wright is Director of Hanover Direct, Inc., Reliance
Standard Life Insurance Company (and its affiliates), Deotexis, Inc., GVA
Williams, The Navigators Group, Inc., Quadlogic Controls Corp., and U.S.
Timberlands Company, L.P.
All of the executive officers listed above devote their full business
time to the Company. All of the officers and directors of the Company and its
subsidiaries are elected annually for one-year terms. All officers and directors
hold office until their successors are duly elected and qualified.
The By-laws of the Company provide that the Board of Directors shall
set the number of directors. The Company's Board of Directors currently consists
of nine directors.
The Board of Directors has an Audit Committee, which also acts as a
Transactions Committee, consisting of Messrs. Harmeling, McLaughlin, Veed and
Wright; a Compensation Committee consisting of Ms. Fleming and Messrs. Harmeling
and Veed; and an Executive Committee consisting of Messrs. Barasch, Cooper,
Harnett, McLaughlin and Spass. The Audit Committee is empowered to consult with
the Company's independent auditors with respect to their audit plans and to
review their audit report and the accompanying management letters and, as the
Transactions Committee, reviews and makes recommendations to the Board on
certain capital transactions entertained by the Company. The Compensation
Committee reviews and recommends compensation, including incentive stock option
grants, of officers of the Company. The Executive Committee has the authority to
act between Board meetings on behalf of the Board, on all matters allowed by
law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding transactions with management, directors and
others with the Registrant is incorporated by reference to Universal American
Financial Corp.'s definitive proxy statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 within 120 days after the end of
the Company's fiscal year ended December 31, 2000.
ITEM 2 - PROPERTIES
The company currently leases from unaffiliated parties: (i)
approximately 9,000 square feet of office space in Rye Brook, New York, under a
lease expiring in October 2004; (ii) 2,500 square feet of office space, under a
lease expiring in August 2003; 29,000 square feet of office space, under a lease
expiring in February 2004; and 1,600 square feet of office space, under a lease
expiring in June 2005, in Orlando, Florida; (iii)1,200 square feet of rental
house space, under a lease expiring August 2001, 5,100 square feet of warehouse
space, under a lease expiring June 2005; 32,000 square feet of office space,
under a lease expiring in November 2007, with one renewal at the Company's
option for a period of five years; and 8,200 square feet of office/warehouse
space, under a lease expiring November 2007; 6,000 square feet of warehouse
space, under a lease expiring November 2007 in Pensacola, Florida; (iv) 2,700
square feet in Richardson, Texas, under a lease expiring in March 2001; (v)
67,000 square feet in Raleigh, North Carolina, under a lease expiring January
2001; (vi) 22,000 square feet of office space and 6,000 square feet of warehouse
space, both under a lease expiring November 2001 in Mississauga, Ontario; (vii)
14,300 square feet of office space in Clearwater, Florida, under a lease
expiring December 2002; (viii) 11,500 square feet of office space in Weston,
Florida, under a lease expiring June 2008. These leases represent the operating
offices of American Progressive, American Pioneer Life, WorldNet Services Corp,
American Exchange Life, Pennsylvania Life, PennCorp Life of Canada, AIAG, and
CHCS respectively, and carry an aggregate annual rental of approximately $1.8
million. The company also leases a smaller office in Andalusia, Alabama, for an
aggregate annual rental of approximately $17,000.
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ITEM 3 - LEGAL PROCEEDINGS
No reportable litigation was pending at December 31, 2000. The
Company is party to various lawsuits arising out of the ordinary conduct of its
business, none of which, the Company believes, would have a material adverse
effect upon the business of the Company if it were to be adversely determined.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of
stockholders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year for which this report is filed.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF PUBLICLY TRADED SECURITIES
The Company's Common Stock has been traded in the over-the-counter
market and quoted on the Nasdaq National Market under the symbol UHCO since May
12, 1983. The following table sets forth the high and low sales prices per share
of Common Stock as reported on the Nasdaq National Market for the periods
indicated.
Common Stock
High Low
1998
First Quarter 3.000 2.375
Second Quarter 2.938 2.938
Third Quarter 2.875 2.125
Fourth Quarter 2.875 2.000
1999
First Quarter 4.000 3.000
Second Quarter 4.000 3.031
Third Quarter 5.188 3.375
Fourth Quarter 4.813 3.375
2000
First Quarter 4.625 3.500
Second Quarter 4.156 3.250
Third Quarter 5.250 3.688
Fourth Quarter 4.375 3.813
2001
First Quarter (through March 1) 4.188 3.438
As of March 1, 2001, there were approximately 1,900 holders of record
of the Common Stock. On March 1, 2001, the bid and ask sales prices for the
Common Stock were $3.875 and $4.000.
DIVIDENDS
The Company has neither declared nor paid dividends on its Common
Stock and no such dividends are likely in the foreseeable future. Any future
decision to pay dividends will be made by the Board of Directors in light of
conditions then existing, including the Company's results of operations,
financial condition and requirements, loan covenants, insurance regulatory
restrictions, business conditions and other factors. In addition, the ability of
the Company to pay cash dividends, if and when it
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should wish to do so, may depend on the ability of its subsidiaries to pay
dividends to the Company. See "Regulation - Dividend and Distribution
Restrictions".
25
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31,
------------------------------------------------------------------------
INCOME STATEMENT DATA: 2000 (7) 1999 (4) 1998 1997 (5) 1996 (6)
-------- --------- -------- --------- ----------
(In thousands, except for per share data)
Direct premium and policyholder fees $451,323 $252,553 $131,044 $ 99,339 $ 55,287
Reinsurance premium assumed 3,055 1,751 998 998 10,522
Reinsurance premium ceded (234,625) (138,827) (89,546) (62,623) (25,664)
-------- --------- -------- --------- ----------
Net premium and other policyholder fees 219,753 115,477 42,496 37,714 40,145
Net investment income 56,945 29,313 10,721 10,023 9,850
Realized gains 146 (241) 256 1,133 240
Fee and other income 7,247 3,587 2,616 2,460 3,152
Total revenues 284,091 148,136 56,089 51,330 53,387
Total benefits, claims and other
Deductions 251,025 132,080 52,157 48,119 53,014
Operating income before taxes 33,066 16,056 3,932 3,211 373
Net income after taxes 22,885 9,813 2,608 2,119 104
Net income applicable to common
Shareholders (1) 22,885 9,633 2,174 1,870 104
Earnings per share:
Basic $0.49 $0.42 $0.29 $0.26 $0.01
Diluted $0.49 $0.34 $0.20 $0.18 $0.18
December 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------
(In thousands, except for per share data)
Total cash and investments $824,930 $812,297 $164,674 $159,429 $144,681
Total assets 1,189,864 1,153,421 283,302 272,575 242,237
Policyholder account balances 223,681 238,665 154,886 145,085 134,539
Loan payable 69,650 70,000 4,750 3,500 --
Series B Preferred Stock -- -- 4,000 4,000 4,000
Series C Preferred Stock -- -- 5,168 5,168 --
Series D Preferred Stock -- -- 2,250 -- --
Stockholders' equity 173,949 133,965 28,318 25,706 22,079
Stockholders' equity per share of
Common Stock :
Basic (2) $3.72 $2.92 $3.18 $2.96 $2.53
Diluted (3) $3.67 $2.91 $2.59 $2.39 $2.12
(1) After provision for Series C Preferred Stock dividends of $180, $433 and
$250 for the years ended December 31, 1999, 1998 and 1997, respectively.
(2) Basic stockholders' equity per share of common stock represents
stockholders' equity less the statement value of Series B Preferred Stock
divided by outstanding shares of common stock.
(3) Diluted stockholders' equity per share of common stock represents
stockholders' equity plus the statement value of the Series C Preferred
Stock, redemption accrual on the Series C Preferred Stock, the Series D
Preferred Stock, the proceeds from the exercise of outstanding options and
warrants divided by outstanding shares of common stock plus the stock
issued pursuant to the conversion of the Series B, Series C and Series D
Preferred Stock and the exercise of the options and warrants outstanding.
(4) Includes the results of the Penn Union Companies since its acquisition on
July 30, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(5) Includes the results of American Exchange since its acquisition on December
1, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(6) Includes the results of the First National block of business since its
acquisition on October 1, 1996.
(7) Includes the results of AIAG since its acquisition on January 6, 2000, and
CHCS since its acquisition on August 10, 2000.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding certain forward-looking
statements contained in the following discussion and elsewhere in this report
and in any other oral or written statements, either made by, or on behalf of the
Company, whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not based on
historical information. They relate to future operations, strategies, financial
results or other developments. In particular, statements using verbs such as
"expect," "anticipate," "believe" or similar words generally involve
forward-looking statements. Forward-looking statements include statements that
represent the Company's products, investment spreads or yields, or the earnings
or profitability of the Company's activities.
Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond the Company's control and are subject to
change. These uncertainties can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable events or developments, some of which may be
national in scope, such as general economic conditions and interest rates. Some
of these events may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to Universal American specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio, and other
factors. Universal American disclaims any obligation to update forward-looking
information.
INTRODUCTION
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related consolidated footnotes included
elsewhere.
The Company owns nine insurance companies (collectively, the "Insurance
Subsidiaries"): American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American
Pioneer"), American Exchange Life Insurance Company ("American Exchange"),
Constitution Life Insurance Company ("Constitution Life"), Marquette National
Life Insurance Company ("Marquette"), Peninsular Life Insurance Company
("Peninsular Life"), Pennsylvania Life Insurance Company ("Pennsylvania Life"),
PennCorp Life Insurance Company of Canada ("PennCorp Life of Canada") and Union
Bankers Insurance Company ("Union Bankers"). Six of these companies,
Pennsylvania Life, PennCorp Life of Canada, Peninsular, Union Bankers,
Constitution and Marquette, as well as certain other related assets, were
acquired on July 30, 1999. In addition to the Insurance Subsidiaries, Universal
American owns three third party administrators: American Insurance
Administration Group, Inc. ("AIAG"), which was purchased January 2, 2000,
Capitated Health Care Services, Inc., ("CHCS"), which was purchased August 10,
2000 and WorldNet Services Corp. ("WorldNet") that process the Company's
brokerage senior market policies, as well as business for unaffiliated insurance
companies.
DESCRIPTION OF SEGMENTS
Currently, the Company manages its business, with primary emphasis on
its distribution channels, through four operating segments, Senior Market
Brokerage, Career Agency, Special Markets and Administrative Services and also
maintains a Corporate segment.
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SENIOR MARKET BROKERAGE - This distribution channel consists of a general agency
system and insurance brokerage system that focus on the sale of products in the
senior market segment, including Medicare Supplement, long term Care, Final
Expense Life Insurance and annuities.
CAREER AGENCY SYSTEM - The Career Agency Segment was acquired in the 1999
Acquisition in July 1999 and comprises the operations of Pennsylvania Life and
PennCorp Life of Canada. PennCorp Life of Canada operates exclusively in Canada,
while Pennsylvania Life operates in both the U.S. ("Pennsylvania Life U.S.") and
Canada. The Career Agency segment is comprised of a career agency field force,
which distributes fixed benefit accident and sickness, life insurance and
supplemental senior health insurance in the United States and Canada. The Career
Agents are under exclusive contract with Pennsylvania Life and PennCorp Life of
Canada.
SPECIAL MARKETS - Through its own operating history and through prior
acquisitions, Universal American has accumulated various lines of business that
it manages in its Special Markets segments. These products include traditonal,
interest-sensitive and group life insurance, individual medical and other
accident and health insurance.
ADMINISTRATIVE SERVICES - In connection with the acquisition of AIAG and CHCS,
Universal American has increased its efforts on the development of the
Administrative Services segment. The primary services are to act as a third
party administrator and service provider on various senior supplemental health
insurance products offered by both affiliated and unaffiliated insurance
companies. Services performed include policy underwriting, telephone
verification, policyholder services, claims adjudication, clinical case
management, care assessment and referral to health care facilities.
CORPORATE & ELIMINATIONS - This segment includes the corporate activities of the
holding company, including interest on debt. This segment also includes the
elimination of intersegment revenues and expenses that are reported gross in
each of the operating segments. These eliminations affect the amounts reported
on the individual financial statement line items, but do not change operating
income before taxes. The significant items eliminated include intersegment
revenue and expense relating to services performed by the Administrative
Services segment for the Career Agency, Senior Market Brokerage and Special
Market segments and interest on notes issued by the Corporate segment to the
other operating segments.
RESULTS OF OPERATIONS - CONSOLIDATED OVERVIEW
For the purposes of assessing each segment's contribution to net
income, management evaluates the results of these segments on a pre-tax, and
realized gain (loss) basis. The following table reflects each segment's
contribution to net income and a reconciliation to net income for these items.
For the year ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
Career Agency $29,426 $12,198 $ -
Senior Market Brokerage 5,491 3,871 2,084
Special Markets 4,790 4,618 1,115
Administrative Services 3,844 2,036 1,980
-------- -------- -------
Segment operating income 43,551 22,723 5,179
Corporate & Eliminations (10,631) (6,426) (1,503)
-------- -------- -------
Operating income before realized gains and Federal income 32,920 16,297 3,676
taxes
Realized gains (losses) 146 (241) 256
Federal income taxes (10,181) (6,243) (1,324)
Redemption accrual on Series C and Series D Preferred Stock -- (180) (434)
-------- -------- -------
Net Income $22,885 $ 9,633 $ 2,174
======== ======== ========
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YEARS ENDED DECEMBER 31, 2000 AND 1999
Consolidated net income after Federal income taxes increased by $13.3
million to $22.9 million ($0.49 per share) in 2000, compared to $9.6 million
($0.34 per share) in 1999. Operating income before realized gains and Federal
income taxes increased by $16.6 million to $32.9 million in 2000 compared to
$16.3 million in 1999.
Operating income from the Career Agency segment increased by $17.2
million, reflecting the impact of a full year's results in 2000 compared to five
months in 1999. The results for 2000 trend consistently with 1999 on an
annualized basis.
The Senior Market Brokerage segment improved results by more than 40%,
increasing operating income by $1.6 million. This improvement is the result of
continued internally generated growth of business in the segment, primarily in
the medicare supplement and long term care lines, offset in part by a slight
deterioration in overall loss ratios for the segment.
The operating results for the Special Markets segment improved by
approximately 4% over 1999. This reflects the impact of a full year's results in
2000 from the companies acquired in 1999 compared to five months in 1999.
However, underwriting results for the segment were negatively impacted by a
deterioration of the loss ratios in the major medical line of business. Based,
in part by the poor performance of this block of business, and in an effort to
focus more on strategic lines, management decided to exit the major medical
business during 2000 and as a result, wrote off $1.4 million of deferred
acquisition costs relating to that line of business.
Operating income for the Administrative Services segment nearly doubled
in 2000 compared to 1999, primarily as a result of the acquisitions of AIAG in
January, 2000 and CHCS in August 2000.
The increase in the operating loss from the Corporate & Eliminations
segment reflects the inclusion of a full year of costs related to the
acquisition financing in 2000, compared to five months for 1999.
The effective tax rate for the Company was 30.8% for 2000 as compared
to 38.9% in 1999. The decrease in the tax rate was primarily due to the release
of valuation reserves on certain of the tax loss carryforwards which were not
considered necessary as a result of the increased profitability of the
Administrative Services segment.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Consolidated net income after Federal income taxes increased by $7.5
million to $9.6 million ($0.34 per share) in 1999, compared to $2.2 million
($0.20 per share) in 1998. Operating income before realized gains and Federal
income taxes increased by $12.6 million to $16.3 million in 1999 compared to
$3.7 million in 1998.
The addition of the Career Agency segment, acquired in July, 1999 added
$12.2 million of operating income during 1999.
The Senior Market Brokerage segment improved by $1.8 million, compared
to 1998 as a result of internally generated growth combined with improvement in
overall loss ratios.
The Special Market segment improved by over $3.5 million, primarily as
the result of the companies acquired during 1999.
Results for the Administrative Services segment for 1999 were
consistent with 1998.
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The effective tax rate for the Company was 38.9% in 1999 as compared to
33.8% in 1998. The increase in the tax rate was primarily due to the addition of
the Canadian operations included in the Career Agency segment. The effective tax
rate on the Canadian operations was approximately 45%.
SEGMENT RESULTS - CAREER AGENCY
For the year ended December 31,
---------------------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $17,258 $ 7,198 $ --
Accident & Health 112,100 48,365 --
-------- ------- -------
Net premiums 129,358 55,563 --
Net investment income 31,714 12,133 --
Other income 647 228 --
-------- ------- -------
Total revenue 161,719 67,924 --
-------- ------- -------
Policyholder benefits 81,432 30,396 --
Interest credited to policyholders 1,657 437 --
Change in deferred acquisition costs (12,476) (2,919) --
Amortization of present value of future profits and
goodwill (584) (427) --
Commissions and general expenses, net of allowances 62,264 28,239 --
-------- ------- -------
Total benefits, claims and other deductions 132,293 55,726 --
-------- ------- -------
Segment operating income $29,426 $12,198 $ --
-------- ------- -------
YEAR ENDED DECEMBER 31, 2000 AND 1999
Operating income from the Career Agency segment increased by $17.2
million, reflecting the impact of a full year's results in 2000 compared to five
months in 1999.
REVENUES. Net premiums for the year fell by approximately 3% for the
segment compared to 1999 on an annualized basis. Canadian operations accounted
for approximately 36% of the net premiums for both 2000 and 1999. During the
year, the Company began to develop new products for the Career Agency sales
force which are based on the Senior Market Brokerage products. Additionally, the
Company was focused on the recruiting and training of new agents during the
year. Management expects that the impact of these efforts will begin to be
reflected in the Segment's results during the first half of 2001.
Net investment income increased by approximately 9% over 1999 on an
annualized basis. The increase results from the increase in the average invested
assets for the comparable periods. Average invested assets increased as a result
of earnings for the year, as well as the movement of the proceeds from certain
acquisition related transactions from short-term in 1999 to long-term
investments in 2000.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately 12% compared to 1999 on an
annualized basis. This was due to higher overall loss ratios.
The increase in deferred acquisition costs was approximately $5.5
million more in 2000, compared to the increase in 1999 on an annualized basis
and is directly related to the new business sold in 2000. The deferred
acquisition costs in this segment relates solely to business sold subsequent to
the Penn Union acquisition.
Commissions and other operating expenses decreased by approximately
$5.5 million or 8% in 2000 compared to 1999 on an annualized basis.
Approximately $2.2 million of the decrease relates to a reduction in the overall
commission rate for the Career Agents, as well as a reduction in stock-based
compensation related to agent production. The remaining decrease relates to the
decrease in production as compared to 1999 on an annualized basis.
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SEGMENT RESULTS - SENIOR MARKET BROKERAGE
For the year ended December 31,
---------------------------------------
2000 1999 1998
------- ------- --------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $ 3,669 $ 1,068 $ 1,738
Accident & Health 48,451 31,574 20,069
------- ------- --------
Net premiums 52,120 32,642 21,807
Net investment income 11,391 9,422 8,166
Other income 3 41 --
------- ------- --------
Total revenue 63,514 42,105 29,973
------- ------- --------
Policyholder benefits 40,656 23,643 16,589
Interest credited to policyholders 4,996 5,550 5,458
Change in deferred acquisition costs (5,015) (3,722) (3,783)
Amortization of present value of future profits and
goodwill 183 183 200
Commissions and general expenses, net of allowances 17,203 12,580 9,425
------- ------- --------
Total benefits, claims and other deductions 58,023 38,234 27,889
------- ------- --------
Segment operating income $ 5,491 $ 3,871 $ 2,084
------- ------- --------
The table below details the gross premiums and policyholder fees before
reinsurance for the major product lines in the Senior Market brokerage segment
and the corresponding average amount of premium retained. The Company reinsures
all of its senior market brokerage products to unaffiliated third party
reinsurers under various quota share agreements. Medicare Supplement written
premium is reinsured under quota share reinsurance agreements ranging between
50% and 75% based upon the geographic distribution. The Company has also
acquired various blocks of Medicare Supplement premium, which are reinsured
under quota share reinsurance agreements ranging from 75% to 100%. Under these
reinsurance agreements, the Company reinsures the claims incurred and
commissions on a pro rata basis and receives additional expense allowances for
policy issue, administration and premium taxes.
2000 1999 1998
---- ---- ----
Gross Net Gross Net Gross Net
Premiums Retained Premiums Retained Premiums Retained
Medicare Supplement acquired $145,972 8% $95,062 13% $66,263 20%
Medicare Supplement written 82,013 31% 34,810 34% 13,913 41%
Other supplemental health 20,701 56% 12,812 60% 7,943 50%
Senior life insurance 6,625 50% 3,560 50% 4,288 50%
------ ------ ------
Total Gross premiums $255,311 20% $146,244 22% $92,407 24%
=========== =========== =========
YEAR ENDED DECEMBER 31, 2000 AND 1999
Operating income from the Senior Market Brokerage segment increased by
$1.6 million, or 42%, in 2000 compared to 1999.
REVENUES. Gross premium written increased $109.1 million, or 75% over
1999. This increase consists of an increase of $47.2 million, or 135%, on
Medicare Supplement business written by the Insurance Subsidiaries, an increase
of $50.9 million on Medicare Supplement premium acquired through acquisition, an
increase of $7.9 million in other senior supplemental health premium and $3.1
million in senior life insurance premium.
This increase in gross premium written by the Insurance Subsidiaries
was the result of the increase in sales of $48.5 million, or 133%, of the senior
market product portfolio from $36.6 million in
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1999 to $85.1 million in 2000. Medicare Supplement written premium grew as a
result of the increase in number of general agents under contract and by the
dis-enrollment of policyholders by various Health Maintenance Organizations
("HMO's"). In addition, premiums increased due to various rate increases
implemented by the Company in 2000, offset by expected lapses.
The 1999 amount of Medicare Supplement acquired gross premium includes
approximately $36.7 million of gross premiums received on the policies acquired
in the 1999 Acquisition for the five months ended December 31, 1999. This
premium amounts to $88.1 million on an annualized basis and as adjusted, 1999
premiums for the acquired blocks of business decreased by $0.5 million compared
to 1998.
The increase of $7.9 million in other supplemental senior health gross
premiums is the result of increased sales of long term care products and an
increase of $2.8 million due to the inclusion in 2000 of twelve months of
long term care premiums acquired in the 1999 Acquisition compared to five months
in 1999. Senior life insurance premium increased as a result of more general
agents under contract.
Net premiums for the year increased by approximately $19.5 million, or
60%, compared to 1999. The net premiums did not increase in line with the gross
premiums due to the amount of retained Medicare Supplement written premium
decreasing from 34% in 1999 to 31% in 2000. This reduction in retained premium
is a result of increased writing by American Pioneer that has 75% quota share
reinsurance agreements in force. The retained Medicare Supplement acquired
premium decreased from 13% in 1999 to 8% in 2000 as a result of the inclusion of
a full year of the Medicare Supplement premium acquired in connection with the
1999 Acquisition, which premium was 100% reinsured under agreements that
predated the acquisition. The other supplemental senior health insurance
retained decreased from 60% in 1999 to 56% in 2000 as result of the increased
writing of long-term care insurance that is reinsured pursuant to 50% quota
share reinsurance agreements.
Net investment income increased by approximately 21% over 1999 as a
result of the increase in the average invested assets for the comparable
periods. Average invested assets increased as a result of earnings for the year.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $17.0 million, or 72%,
compared to 1999. The net policyholder benefits increased more than the net
premium primarily due to an increase in loss ratios on the Medicare Supplement
written policies from approximately 70% in 1999 to 75% in 2000. The Company has
implemented rate increases, which will be effective during 2001. The loss ratios
on the Medicare Supplement acquired policies decreased slightly from 84% in 1999
to 83% in 2000. In addition, the net benefits incurred on the business acquired
in the 1999 Acquisition increased $2.0 million as a result of including twelve
months of operations in 2000 compared to five months in 1999.
Interest credited to policyholders decreased by approximately $0.6
million, or 10%, as a result of the decrease in the effective interest rate
credited to the policies in 2000 compared to 1999 and the expected lapses of the
policies in force.
The increase in deferred acquisition costs was approximately $1.3
million more in 2000, compared to the increase in 1999. The increase in deferred
acquisition costs relates to the increase in premiums issued during 2000
compared to 1999.
Commissions and other operating expenses increased by approximately
$4.6 million or 37% in 2000 compared to 1999. The following table details the
components of commission and other operating expenses:
2000 1999
---- ----
Commissions $ 43,131 $ 24,181
Other operating costs 33,345 21,262
Reinsurance allowances (59,273) (32,863)
-------- --------
Commissions and general expenses, net of allowances 17,203 $ 12,580
======== ========
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The ratio of commissions to gross premiums remained flat at 16.9% and
16.5% in 2000 and 1999, respectively. Other operating costs as a percentage of
gross premiums decreased to 13.1% in 2000 from 14.5% in 1999. Commission and
expense allowances received from reinsurers as a percentage of the premiums
ceded were flat at 29.2% in 2000 compared to 28.9% in 1999.
YEAR ENDED DECEMBER 31, 1999 AND 1998
Operating income from the Senior Market Brokerage segment increased by
$1.8 million, or 86%, in 1999 compared to 1998.
REVENUES. Gross premium earned before reinsurance increased $53.8
million, or 58%, over 1998. This consists of an increase of $20.9 million on
Medicare Supplement business written by the Insurance Subsidiaries, an increase
of $28.8 million on Medicare Supplement premium acquired through acquisition, an
increase of $4.9 million in supplemental senior health premium and a reduction
of $0.7 million in senior life insurance premium.
This increase in Medicare Supplement gross premium written by the
Insurance Subsidiaries was the result of the rapid growth of the senior market
product portfolio from 1997 to 1999. This growth was a result of the increase in
Medicare Supplement issued premium generated by the increase in the number of
general agents under contract and by the dis-enrollment of policyholders by
various HMO's.
The 1999 amount of Medicare Supplement acquired premium includes
approximately $36.7 million of gross premiums received relating to the 1999
Acquisition for the five months ended December 31, 1999. Medicare Supplement
premiums for the remaining acquired blocks of business decreased by
approximately $7.9 million as a result of expected lapses of the in force
policies.
The increase of $4.9 million in other supplemental senior health gross
premiums is the result of increased sales of long term care products and an
increase of $2.0 million due to the inclusion of long term care premiums
acquired in the 1999 Acquisition for the five months in 1999.
Net premiums for the year increased by approximately $10.8 million, or
50%, compared to 1998. Included in the 1999 amount were $1.9 million of net
premiums acquired in the 1999 Acquisition. The remaining increase was less than
the increase in gross premiums discussed above due to the amount of retained
Medicare Supplement written premium decreasing from 41% in 1998 to 34% in 1999.
This decrease is the result of increased writing by American Pioneer, which has
75% quota share reinsurance agreements in force. The retained Medicare
Supplement acquired premium decreased from 20% in 1998 to 13% in 1999 as a
result of the inclusion of the Medicare Supplement premium acquired in
connection with the 1999 Acquisition, which premium was 100% reinsured under
agreements that predated the acquisition.
Net investment income increased by approximately 15% over 1998 to $9.4
million, as a result of the increase in the average invested assets for the
comparable periods. Average invested assets increased as a result of earnings
for the year.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately $7.1 million, or 43%, from
1998, compared to the increase in net premiums of 50% noted above. The
policyholder benefits did not increase as much as net premiums due to a decrease
in loss ratios on the acquired block of Medicare Supplement premium from
approximately
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95% in 1998 to 84% in 1999. The loss ratios on the Medicare Supplement written
business increased slightly from 69% in 1998 to 70% in 1999. Included in the
1999 amount were $1.4 million of net benefits incurred on the business acquired
in the 1999 Acquisition.
Interest credited to policyholders decreased by approximately $0.6
million, or 10%, as a result of the decrease in the effective interest rate
credited to the policies in 1999 compared to 1998 and the expected lapses of the
policies in force.
The increase in deferred acquisition costs amounted to $3.7 million
and $3.8 million in 1999 and 1998, respectively. Increases in the deferred
acquisition costs on the supplemental senior health products were offset by
corresponding decreases in the annuity deferred acquisition costs balances.
Commissions and other operating expenses increased by approximately
$3.2 million, or 34%, in 1999 compared to 1998. The following table details the
components of commission and other operating expenses:
1999 1998
Commissions $ 24,181 $ 19,516
Other operating costs 21,262 12,815
Reinsurance allowances (32,863) (22,906)
---------- --------
Commissions and general expenses, net of allowances $ 12,580 $ 9,425
========== ========
The ratio of commissions to gross premiums decreased to 16.5% in 1999
from 21.1% in 1998, as a result of the implementation of rate increases on the
acquired Medicare Supplement business. Other operating costs as a percentage of
gross premiums increased to 14.5% in 1999 from 13.9% in 1998 as a result of the
increase in the production of new sales in 1999 over the 1998 amount and the
inclusion of the expenses incurred on the business acquired in the 1999
Acquisition. Commission and expense allowances received from reinsurers as a
percentage of the premiums ceded were flat at 29.2% in 1999 compared to 28.9% in
1998.
SEGMENT RESULTS - SPECIAL MARKETS
For the year ended December 31,
2000 1999 1998
-------- -------- --------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $12,773 $ 9,325 $ 6,485
Accident & Health 25,502 17,947 14,204
-------- -------- --------
Net premiums 38,275 27,272 20,689
Net investment income 14,704 8,662 3,125
Other income 332 246 238
-------- -------- --------
Total revenue 53,311 36,180 24,052
-------- -------- --------
Policyholder benefits 31,831 19,216 14,405
Interest credited to policyholders 3,477 2,681 1,782
Change in deferred acquisition costs 1,566 412 253
Amortization of present value of future profits and 230 314 145
goodwill
Commissions and general expenses, net of allowances 11,417 8,939 6,352
-------- -------- --------
Total benefits, claims and other deductions 48,521 31,562 22,937
-------- -------- --------
Segment operating income $ 4,790 $ 4,618 $ 1,115
-------- -------- --------
YEAR ENDED DECEMBER 31, 2000 AND 1999
Operating results for the year improved approximately 4% in 2000 compared to
1999.
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REVENUES. Net premiums for the year increased by $11.0 million or 40%
compared to 1999. Approximately $10.6 million of the increase, including $3.3
million of life and $7.3 million of accident and health, relates to the impact
of a full year's results in 2000 for the companies acquired in 1999, compared to
five months as reported in 1999.
Net investment income increased by $6.0 million compared to 1999,
primarily due to twelve months of the acquired companies compared to five months
in 1999.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits increased
by $12.6 million in 2000 compared to 1999. Approximately $9.8 million relates to
the impact of a full year's results from the acquired companies in 2000 compared
to five months in 1999. Approximately $2.0 million results from deterioration in
the loss ratios for the health business of the segment. The remaining increase
relates to adverse mortality in 2000 compared to 1999.
The increase in interest credited of $0.8 million was due primarily to
the inclusion of a full year for the acquired companies.
The increase in the net amortization of deferred acquisition costs
relates primarily to the Company's decision to exit the major medical line of
business. As a result of this decision, the Company wrote off approximately $1.4
million of deferred acquisition costs in 2000. The Company believes that it will
be able to cancel, by the end of 2002, approximately $27.0 million of the $31.0
million of annualized premium in force for this line of business.
Commissions and general expenses, net of allowances increased by $2.5
million, or 28%, during 2000. An increase of approximately $3.3 million was due
to the inclusion of a full year's results of the acquired companies in 2000
compared to five months in 1999. Offsetting this increase is a decrease in
operating expenses relating to the existing blocks of business.
YEAR ENDED DECEMBER 31, 1999 AND 1998
Operating results for the year increased by $3.5 million in 1999 compared to
1998, primarily as a result of the addition of certain blocks of business from
the acquired companies in 1999.
REVENUES. Net premiums for the year increased by $6.6 million or 32%
compared to 1999. The Acquired Companies added approximately $11.5 million
during 1999. This increase was offset by a decrease in health premiums at the
existing companies.
Net investment income increased by $5.5 million compared to 1998. The
Acquired Companies added $4.8 million during 1999. The remaining increase
relates to an increase in the invested assets of the existing companies.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits increased
by $4.8 million in 1999 compared to 1998. Approximately $8.1 million relates the
Acquired Companies. Offsetting this was a decrease at the existing companies,
directly related to the decrease in premiums noted above.
The increase in interest credited of $0.9 million was due primarily to
the addition of the acquired companies.
Commissions and general expenses, net of allowances increased by $2.6
million or 41% during 1999. An increase of approximately $3.5 million was due to
the addition of the acquired companies in 1999. Offsetting this increase is a
decrease in operating expenses for the existing blocks of business, related to
the decrease in premium noted above.
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SEGMENT RESULTS - ADMINISTRATIVE SERVICES
For the year ended December 31,
2000 1999 1998
------ ------- ------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $ -- $ -- $ --
Accident & Health -- -- --
------ ------- ------
Net premiums -- -- --
Net investment income 77 -- --
Other income 24,130 9,290 8,700
------ ------- ------
Total revenue 24,207 9,290 8,700
------ ------- ------
Policyholder benefits -- -- --
Interest credited to policyholders -- -- --
Change in deferred acquisition costs -- -- --
Amortization of present value of future profits and 2,920 -- --
goodwill
Commissions and general expenses 17,443 7,254 6,720
------ ------- ------
Total benefits, claims and other deductions 20,363 7,254 6,720
------ ------- ------
Segment operating income $ 3,844 $ 2,036 $ 1,980
------ ------- ------
YEAR ENDED DECEMBER 31, 2000 AND 1999
Administrative service revenue increased by $14.8 million, or 160%, in
2000 as compared to 1999. Fees from AIAG, acquired in January 2000 and CHCS,
acquired in August 2000 added $10.3 million and $2.2 million, respectively, to
the segment in 2000. Affiliated revenues at WorldNet increased by $2.7 million
as a result of the increase in premiums serviced by WorldNet on behalf of the
affiliated insurance subsidiaries.
Currently, the Administrative Services segment administers more than
$330.0 million of annualized in-force premium. Approximately $304.0 million of
annualized premium in-force is administered on behalf of affiliates. This
combined with fees for telephone support and managed care and claims services on
behalf of the affiliated insurance subsidiaries generated $18.1 million of
affiliated revenue for the year ended December 31, 2000. The remaining $6.0
million was generated from services provided to unrelated companies.
The amortization of present value of future profits ("PVFP") and
goodwill relates primarily to the acquisition of AIAG. Approximately $7.7
million of PVFP was established when AIAG was acquired. It is being amortized in
proportion to the expected profits from the contracts in force on the date of
acquisition. A large portion of the contracts had a remaining term of three
years; accordingly, the amortization is heavily weighted to those periods.
During 2000, approximately $2.8 million or 36% of the original balance was
amortized. Based on the current schedule, the Company anticipates amortizing
approximately 27% and 20% in 2001 and 2002, respectively. The remaining
amortization relates to the goodwill established in connection with the
acquisition of CHCS.
Operating expenses for the segment increased by $10.2 million.
Approximately $8.1 million of the increase relates to the acquisition of AIAG
and CHCS. The remaining increase relates to the costs associated with the
increase in business administered for the affiliated insurance subsidiaries.
YEAR ENDED DECEMBER 31, 1999 AND 1998
Administrative service revenue increased by $0.6 million, or 7%, in
1999 as compared to 2000. This increase relates to affiliated revenues at
WorldNet as a result of the increase in premiums serviced by WorldNet on behalf
of the affiliated insurance subsidiaries. During 1999, WorldNet's business was
primarily the administration of certain blocks of business on behalf of the
affiliated insurance subsidiaries.
Operating expenses for the segment increased by $0.5 million in 1999 as
compared to 1998. The increase relates to the costs associated with the increase
in business administered for the affiliated insurance subsidiaries.
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SEGMENT RESULTS - CORPORATE & ELIMINATIONS
For the year ended December 31,
2000 1999 1998
--------- -------- --------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $ -- $ -- $ --
Accident & Health -- -- --
--------- -------- --------
Net premiums -- -- --
Net investment income (941) (904) (570)
Other income (17,865) (6,218) (6,322)
--------- -------- --------
Total revenue (18,806) (7,122) (6,892)
--------- -------- --------
Policyholder benefits -- -- --
Interest credited to policyholders -- -- --
Change in deferred acquisition costs -- -- --
Amortization of present value of future profits and -- -- --
goodwill
Commissions and general expenses, net of allowances (8,175) (696) (5,389)
--------- -------- --------
Total benefits, claims and other deductions (8,175) (696) (5,389)
--------- -------- --------
Segment operating loss $(10,631) $ (6,426) $ (1,503)
--------- -------- --------
The above results reflect the elimination of revenues and expenses
associated with services performed by the Administrative Services segment for
affiliates of $18.1 million, $7.3 million and $6.5 million, respectively for
2000, 1999 and 1998 and the elimination of interest income and expense on bonds
issued by the Corporate segment to an affiliate of $0.7 million, $0.7 million
and $0.6 million, respectively for 2000, 1999 and 1998.
The following table presents the primary components comprising the
segment's operating loss, exclusive of the above noted eliminations:
For the year ended December 31,
2000 1999 1998
-------- ------- -------
(in thousands)
Interest cost of acquisition financing $ 7,097 $ 2,859 $ --
--
Amortization of capitalized loan origination fees 528 220 --
Interest expense on bonds issued to affiliate 703 672 603
Stock-based compensation expense 757 921 --
Other parent company expenses 1,844 1,789 1,036
Other (revenue) expenses, net (298) (35) (136)
-------- ------- -------
Segment operating loss $ 10,631 $ 6,426 $ 1,503
-------- ------- -------
YEARS ENDED DECEMBER 31, 2000 AND 1999
The increase in the interest cost and the amortization of capitalized
loan fees reflects the impact of a full year's costs compared to five months in
1999. The stock-based compensation expense decreased due to termination of
options as the result of employees leaving the company prior to vesting.
YEARS ENDED DECEMBER 31, 1999 AND 1998
The interest cost and the amortization of capitalized loan fees related
to the financing of the 1999 Acquisition on July 31, 1999. Accordingly, 1999
includes five months of these costs. The Corporate segment incurred stock-based
compensation expenses of approximately $0.9 million related to the issue of
stock options and bonuses to employees and members of management.
In January 2000, the Company announced that it had approved a plan to
consolidate the Raleigh location acquired in the 1999 Acquisition into its
locations in Toronto (Canada), Pensacola (Florida) and Orlando (Florida) in
order to improve operating efficiencies and capabilities. The plan to
consolidate this location was being formed at the date of the acquisition and
was approved by the Board of Directors.
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Accordingly, the Company recorded an $11.1 million restructuring liability in
its accounting for the 1999 Acquisition. These restructuring costs were
accounted for under EITF No 95-3, "Recognition of Liabilities in Connection with
a Purchase Business Combination" ("EITF 95-3").
As of December 31, 2000, the remaining liability consisted of employee
separation costs ($1.6 million), employee relocation costs ($1.0 million) and
other relocation and exit costs ($0.4 million).
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for capital is primarily to maintain or increase the
surplus of its Insurance Subsidiaries and to support the Company as an insurance
holding company, including the maintenance of its status as a public company. In
addition, the Company requires capital to fund its anticipated growth through
acquisitions of other companies and blocks of insurance business.
The Company
The Company requires cash to pay the operating expenses necessary to
function as an insurance holding company (which under applicable Insurance
Department regulations must bear its own expenses), and to meet the cost
involved in being a publicly owned company. In addition, it requires cash to
meet Universal American's obligations under the loan agreement discussed below
and the debentures outstanding with American Progressive.
Loan Agreements
As of December 31, 2000, the Company had outstanding $69.5 million of
an $80 million credit facility consisting of a $70 million term loan and a $10
million revolving loan facility. The term loan calls for interest at the London
Interbank Offering Rate for one, two, three or six months ("LIBOR") plus 350
basis points (currently 9.38%) with principal repayment over a seven-year period
and a final maturity date of July 31, 2006. The term loan is secured by a first
priority interest in 100% of the outstanding common stock of American Exchange,
American Progressive, PFI, Inc. (an immaterial subsidiary), Quincy Coverage
Corp. (an immaterial subsidiary), and WorldNet and 65% of the outstanding common
stock of UAFC (Canada) Inc. (the 100% parent of PennCorp Life of Canada). The
Company has drawn down $3.0 million of the revolving loan facility in connection
with the acquisition of CHCS, Inc. in August 2000 and pays a commitment fee of
50 basis points on the unutilized facility. For the year ended December 31,
2000, the Company paid $7.1 million in interest and $3.4 million in principal.
In connection with an agreement entered into 1996 whereby American
Pioneer became a direct subsidiary of Universal American, rather than an
indirect subsidiary owned through American Progressive, Universal American has
$7.9 million in debentures outstanding to its subsidiary, American Progressive.
The debentures pay interest quarterly at 8.50% and are due between September
2002 and May 2003. During the year ended December 31, 2000 the Company paid $0.7
million in interest on these debentures to American Progressive, which was
eliminated in consolidation.
Management believes that the current cash position, the availability of
the revolving loan facility, the expected cash flows of the non-insurance
companies, the surplus note interest payments from American Exchange and the
availability of dividends from its Insurance Subsidiaries can support the
obligations of Universal American noted above for the foreseeable future.
However, there can be no assurance as to the expected future cash flows or to
the availability of dividends from the Insurance Subsidiaries.
Insurance Subsidiaries
American Progressive, American Pioneer, American Exchange, Constitution
Life, Marquette, Peninsular Life, PennCorp Life of Canada, Pennsylvania Life and
Union Bankers (collectively, the "Insurance Subsidiaries") are required to
maintain minimum amounts of capital and surplus as determined
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by statutory accounting. Each of the Insurance Subsidiaries' statutory capital
and surplus exceeds its respective minimum requirement. However, substantially
more than such minimum amounts are needed to meet statutory and administrative
requirements of adequate capital and surplus to support the current level of the
Insurance Subsidiaries' operations. At December 31, 2000 the statutory capital
and surplus, including asset valuation reserves, of the U.S. Insurance
Subsidiaries totaled $86.5 million.
The National Association of Insurance Commissioners ("NAIC") imposes
regulatory risk-based capital ("RBC") requirements on life insurance enterprises
and at December 31, 2000 all of the Insurance Subsidiaries maintained ratios of
total adjusted capital to RBC in excess of the Authorized Control Level.
PennCorp Life of Canada and Pennsylvania Life's Canadian branch report
to Canadian regulatory authorities based upon Canadian statutory accounting
principles that vary in some respects from U.S. statutory accounting principles.
Canadian net assets based upon Canadian statutory accounting principles were
$56.5 million as of December 31, 2000. PennCorp Life of Canada maintained a
Minimum Continuing Capital and Surplus Requirement Ratio ("MCCSR") in excess of
the minimum requirement and Pennsylvania Life's Canadian branch maintained a
Test of Adequacy of Assets in Canada and Margin Ratio ("TAAM") in excess of the
minimum requirement at December 31, 2000.
Cash generated by the Insurance Subsidiaries will be made available to
Universal American, the ultimate parent, principally through periodic payments
of principal and interest on surplus debentures. Currently, the surplus notes
between Universal American and American Exchange total $70 million, which calls
for interest at the LIBOR rate plus 375 basis points. The Company anticipates
that the surplus note will be primarily serviced by dividends from Pennsylvania
Life, a wholly owned subsidiary of American Exchange, and by tax-sharing
payments among the insurance companies which are wholly owned by American
Exchange filing a consolidated Federal income tax return. During the year-end
December 31, 2000, Pennsylvania Life and Union Bankers paid dividends amounting
to $2.9 million and $2.0 million, respectively. In addition, the insurance
companies included in the tax allocation agreement with American Exchange, paid
$4.8 million of taxes to American Exchange. During the year ended December 31,
2000, American Exchange paid $7.0 million in interest to Universal American. No
principal payments were made during 2000.
Dividend payments by insurance companies are limited by, or subject to
the approval of the insurance regulatory authorities of each insurance company's
state of domicile. Such dividend requirements and approval processes vary
significantly from state to state. The maximum amount of dividends which can be
paid to American Exchange from Pennsylvania Life without the prior approval of
the Pennsylvania Department of Insurance is restricted to the greater of 10% of
the Pennsylvania Life's surplus as regards policyholders as of the preceding
December 31 or the net gain from operations during the preceding year, but such
dividends can be paid only out of unassigned surplus. Thus, future earnings of
the company would be available for dividends without prior approval, subject to
the restrictions noted above. Based upon the current dividend regulations of the
respective states, Pennsylvania Life and Union Bankers would be able to pay
ordinary dividends of approximately $12.1 million and $1.4 million,
respectively, to American Exchange without the prior approval from the
respective insurance departments.
Liquidity for the Life Insurance Subsidiaries is measured by their
ability to pay scheduled contractual benefits, pay operating expenses, and fund
investment commitments. Sources of liquidity include scheduled and unscheduled
principal and interest payments on investments, premium payments and deposits
and the sale of liquid investments. These sources of liquidity for the Insurance
Subsidiaries significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments including
death benefits, benefits under accident & health policies and interest-sensitive
policy surrenders and withdrawals. The amount of surrenders and withdrawals is
affected by a variety of factors such as credited interest rates for similar
products, general economic conditions and events in the industry that affect
policyholders' confidence. Although the contractual terms of substantially all
of the Company's in force life insurance policies and annuities give the holders
the right to surrender the policies and annuities, the Company imposes
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penalties for early surrenders. At December 31, 2000 the Company held reserves
that exceeded the underlying cash surrender values of its in force life
insurance and annuities by $16.0 million. The insurance companies, in
management's view, have not experienced any material changes in surrender and
withdrawal activity in recent years.
Changes in interest rates may affect the incidence of policy surrenders
and withdrawals. In addition to the potential impact on liquidity, unanticipated
surrenders and withdrawals in a changed interest rate environment could
adversely affect earnings if the Company were required to sell investments at
reduced values in order to meet liquidity demands. The Company manages the asset
and liability portfolios in order to minimize the adverse earnings impact of
changing market rates. The Company seeks to invest in assets that have duration
and interest rate characteristics similar to the liabilities that they support.
The net yields on the Company's cash and invested assets increased
slightly from 6.79% in 1999 to 6.88% in 2000. A significant portion of these
securities are held to support the liabilities for policyholder account
balances, which liabilities are subject to periodic adjustments to their
credited interest rates. The credited interest rates of the interest-sensitive
policyholder account balances are determined by management based upon factors
such as portfolio rates of return and prevailing market rates and typically
follow the pattern of yields on the assets supporting these liabilities.
At December 31, 2000, the Insurance Subsidiaries held cash and cash
equivalents totaling $33.2 million, as well as fixed maturity and equity
securities that could readily be converted to cash with carrying values (and
fair values) of $751.7 million. The fair values of these holdings totaled more
than $784.9 million.
Investments
The Company's investment policy is to balance the portfolio duration to
achieve investment returns consistent with the preservation of capital and
maintenance of liquidity adequate to meet payment of policy benefits and claims.
The Company invests in assets permitted under the insurance laws of the various
states in which it operates. Such laws generally prescribe the nature, quality
of and limitations on various types of investments that may be made. The Company
currently engages the services of three investment advisors under the direction
of the management of the Insurance Subsidiaries and in accordance with
guidelines adopted by their respective Boards of Directors. Conning Asset
Management and Asset Allocation and Management Company manage the Company's
fixed maturity portfolio in the United States and Elliot and Page manages the
Canadian fixed maturity portfolio. The Company's policy is not to invest in
derivative programs or other hybrid securities, except for GNMA's, FNMA's and
investment grade corporate collateralized mortgage obligations. It invests
primarily in fixed maturity securities of the U.S. Government and its agencies
and in corporate fixed maturity securities with investment grade ratings of
"Baa3" (Moody's), "BBB-" (Standard & Poor's) or higher. However, the Company
does own some investments that are rated "BB" or below (together 2.9% and 1.1%
of total fixed maturities as of December 31, 2000 and 1999, respectively). Fixed
maturities with a carrying value of $0.7 million were non-income producing for
the year ended December 31, 2000. During the years ended December 31, 2000 and
1999 the Company wrote down the value of certain fixed maturity securities by
$0.5 million and $0.6 million, respectively, which represents management's
estimate of other than temporary declines in value and was included in net
realized gains (losses) on investments in the accompanying consolidated
statement of operations.
FEDERAL INCOME TAXATION OF THE COMPANY
The Company files a consolidated return for federal income tax
purposes, in which American Exchange and the Acquired Companies are not
currently permitted to be included. At December 31, 2000, the Company (exclusive
of American Exchange and the Acquired Companies) had net operating tax loss
carryforwards of approximately $9.4 million that expire in the years 2005 to
2019. At December 31, 2000, the Company also had an Alternative Minimum Tax
(AMT) credit carryforward for Federal income
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tax purposes of approximately $0.4 million that can be carried forward
indefinitely. As a result of the change in ownership of the Company in July
1999, use of most of the loss carryforwards of the Company are subject to annual
limitations.
American Exchange and the other U. S. Acquired Companies file a
separate consolidated federal income tax return. At December 31, 2000, these
companies had net operating loss carryforwards, most of which were incurred
prior to their acquisition by the Company, of approximately $46.7 million that
expire in the years 2007 to 2013. As a result of the change in ownership of the
Company in July 1999 and the 1999 Acquisition, use of most of the loss
carryforwards are subject to annual limitations.
At December 31, 2000 and 1999, the Company carried valuation allowances
of $10.4 million and $11.3 million, respectively, with respect to its tax loss
carryforwards (deferred tax assets). The Company determines a valuation
allowance based upon an analysis of projected taxable income and through its
ability to implement prudent and feasible tax planning strategies. The tax
planning strategies include the expense reductions anticipated from the
Company's recent reorganization and from the income generated by its
administration companies WorldNet, AIAG and CHCS. As a result of the increased
profitability of the Administrative Services segment, valuation allowances on
certain of the non-life tax loss carryforwards were considered not necessary at
December 31, 2000. The amount of the valuation allowance released was $1.3
million and was recorded as a benefit in the deferred income tax expense. This
decrease was partially offset by the establishment of a valuation allowance for
the purchased net operating losses of CHCS, which are subject to limitation on
their use. Management believes it is more likely than not that the Company will
realize the recorded net deferred tax assets.
The United States Insurance Subsidiaries are taxed as life insurance
companies as provided in the Tax Code. The Omnibus Budget Reconciliation Act of
1990 amended the Tax Code to require a portion of the expenses incurred in
selling insurance products to be capitalized and amortized over a period of
years, as opposed to an immediate deduction in the year incurred. Instead of
measuring actual selling expenses, the amount capitalized for tax purposes is
based on a percentage of premiums. In general, the capitalized amounts are
subject to amortization over a ten-year period. Since this change only affects
the timing of the deductions, it does not, assuming stability of rates, affect
the provisions for taxes reflected in the Company's financial statements
prepared in accordance with GAAP. However, by deferring deductions, the change
does have the effect of increasing the current tax expense, thereby reducing
statutory surplus. Because of the Insurance Subsidiaries' net operating loss
carryforwards, there was no material increase in the Company's current income
tax provision for any of the three years in the period ended December 31, 2000
due to this provision.
EFFECTS OF ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. Its
amendments Statements 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133 and 138,
Accounting for Derivative Instruments and Certain Hedging Activities, were
issued in June, 1999 and June, 2000, respectively. (Collectively these are
referred to as Statement 133). Statement 133 establishes accounting and
reporting standards for derivative instruments and is effective for fiscal years
beginning after June 15, 2000. Because of the minimal use of derivatives,
Management does not anticipate that the adoption will have a significant effect
on earnings or the financial position of the Company.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk relates, broadly, to changes in the value of financial
instruments that arise from adverse movements in interest rates, equity prices
and foreign exchange rates. The Company is exposed principally to changes in
interest rates that affect the market prices of its fixed income securities.
Interest Rate Risk
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The Company could experience economic losses if it was required to
liquidate fixed income securities during periods of rising and/or volatile
interest rates. However, the Company attempts to mitigate its exposure to
adverse interest rate movements through a combination of active portfolio
management and by staggering the maturities of its fixed income investments to
assure sufficient liquidity to meet its obligations and to address reinvestment
risk considerations. The Company's insurance liabilities are generally long
tailed in nature, which generally permits ample time to prepare for their
settlement. To date, the Company has not utilized various financial risk
management tools on its investment securities, such as interest rate swaps,
forwards, futures and options to modify its exposure to changes in interest
rates. However, the Company may consider them in the future.
The Company is aware that certain classes of mortgage backed securities
are subject to significant prepayment risk due to the fact that in periods of
declining interest rates, individuals may refinance higher rate mortgages to
take advantage of the lower rates then available. The Company monitors
investment portfolio mix to mitigate this risk.
Sensitivity Analysis
The Company regularly conducts various analyses to gauge the financial
impact of changes in interest rate on it financial condition. The ranges
selected in these analyses reflect management's assessment as being reasonably
possible over the succeeding twelve-month period. The magnitude of changes
modeled in the accompanying analyses should, in no manner, be construed as a
prediction of future economic events, but rather, be treated as a simple
illustration of the potential impact of such events on the Company's financial
results.
The sensitivity analysis of interest rate risk assumes an instantaneous
shift in a parallel fashion across the yield curve, with scenarios of interest
rates increasing and decreasing 100 and 200 basis points from their levels at
December 31, 2000, and with all other variables held constant. A 100 and 200
basis point increase in market interest rates would result in a pre-tax decrease
in the market value of the Company's fixed income investments of $38.7 million
and $75.4 million, respectively. Similarly, a 100 and 200 basis point decrease
in market interest rates would result in a pre-tax increase in the market value
of the Company's fixed income investments of $40.2 million and $83.1 million,
respectively.
Foreign Currency Sensitivity
Portions of Universal American's operations are transacted utilizing
the Canadian dollar as the functional currency. Approximately 14.1%, 20.0% and
35.6% of Universal American's assets, revenues and operating income before
taxes, as of and for the twelve months ended December 31, 2000, respectively,
were derived from the Canadian operations. As of and for the year ended December
31, 1999, approximately 13.7%, 16.1% and 23.7% of Universal American's assets,
revenues and operating income before taxes, respectively, were derived from
Canadian operations. Accordingly, Universal American's earnings and business
equity are affected by fluctuations in the value of the U.S. dollar as compared
to the Canadian dollar. Although this risk is somewhat mitigated by the fact
that both the assets and liabilities for Universal American's foreign operations
are denominated in Canadian dollars, Universal American is still subject to
translation losses.
Universal American periodically conducts various analyses to gauge the
financial impact of changes in the foreign currency exchange rate on their
financial condition. The ranges selected in these analyses reflect management's
assessment as being reasonably possible over the succeeding twelve-month period.
The magnitude of changes modeled in the following analysis should, in no manner,
be construed as a prediction of future economic events, but rather as a simple
illustration of the potential impact of such events on Universal American's
financial results.
At December 31, 2000, a 10% strengthening of the U.S. dollar relative
to the Canadian dollar would result in a decrease to the operating income before
taxes of approximately $1.1 million and a
41
42
decrease in equity of $5.4 million. Universal American's sensitivity analysis of
the effects of changes in foreign currency exchange rates does not factor in any
potential change in sales levels or local prices.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary schedules are listed in the
accompanying Index to Consolidated Financial Statements and Financial Statement
Schedules on Page F - 1.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
42
43
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding directors and executive officers of the
Registrant is set forth in Part I, Item 1, under the caption "Executive Officers
and Directors"; additional such information is incorporated by reference to
Universal American Financial Corp.'s definitive proxy statement to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934 within 120
days after the end of the Company's fiscal year ended December 31, 2000.
ITEM 11 - EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference to Universal American Financial Corp.'s definitive proxy statement to
be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days after the end of the Company's fiscal year ended December 31,
2000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Universal American
Financial Corp.'s voting securities by directors, officers and persons who, to
the best knowledge of the Company, are known to be the beneficial owners of more
than 5% of the Company's voting securities as of December 31, 2000, is
incorporated by reference to Universal American Financial Corp.'s definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the end of the Company's fiscal year
ended December 31, 2000.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference to Universal American Financial Corp.'s definitive
proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 within 120 days after the end of the Company's fiscal year
ended December 31, 2000.
43
44
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1 AND 2 FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
See separate index to Financial Statements and Financial Statement
Schedules on Page F - 1.
3 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(a) Restated Certificate of Incorporation filed March 30, 2000,
incorporated by reference to Exhibit A of Form 8-K dated March 16, 2001.
3(b) By-Laws, as amended, incorporated by reference to Exhibit A to
Form 8-K dated August 13, 1999.
4 Instruments defining rights of securityholders. See Exhibits
3(a) and 10(e)
10(a) Amended and Restated Purchase Agreement among the Company,
dated December 31, 1999, as amended and restated on July 2,
1999, between Universal American, PennCorp Financial Group,
Inc. and several of PFG's subsidiaries, incorporated by
reference to Annex B of Proxy Statement dated July 12, 1999.
10(b) Share Purchase Agreement, as of December 31, 1998, between the
Company and Capital Z Financial Services Fund II, L.P. as
amended by Amendment, dated as of July 2, 1999, incorporated
by reference to Annex A of Proxy Statement dated July 12,
1999.
10(c) Shareholders Agreement dated July 30, 1999, among the Company,
Capital Z Financial Services Fund II, L.P., UAFC, L.P., AAM
Capital Partners, L.P., Chase Equity Associates, L.P., Richard
A. Barasch and others, incorporated by reference to Exhibit A
of Form 8-K dated August 13, 1999.
10(d) Registration Rights Agreement, dated July 30, 1999, among the
Company, Capital Z Financial Services Fund II, L.P.,
Wand/Universal American Investments L.P.I., Wand/Universal
American Investments L.P. II, Chase Equity Associates, L.P.,
Richard A. Barasch and others, incorporated by reference to
Exhibit A to Form 8-K dated August 13, 1999.
10(e) Credit Agreement dated as of July 30, 1999, among the
Registrant and the Chase Manhattan Bank as agent, the lender
and signatory thereto, incorporated by reference to Exhibit C
to Form 8-KA dated March 16, 2001.
10(f) Employment Contracts, between Registrant and the following
officers: Richard A. Barasch, dated July 30, 1999 Robert A.
Waegelein, dated July 30, 1999 Gary W. Bryant, dated July 30,
1999 William E. Wehner, dated July 30, 1999 incorporated by
reference to Exhibits D and E to Form 8-KA dated March 16,
2001.
44
45
11 Computation of basic and diluted earnings per share, incorporated by
reference to Note 2j of Notes to Consolidated Financial Statements
for 2000, included in this Form 10-K.
12 List of Subsidiaries:
State of Percentage
Name Incorporation Owned
-------- ------------- -----------
American Exchange Life Insurance Company Texas 100%
American Insurance Administration Group, Inc. Florida 100%
American Pioneer Life Insurance Company Florida 100%
American Progressive Life & Health Insurance Company New York 100%
CHCS, Inc. Florida 100%
Constitution Life Insurance Company Texas 100%
Marquette National Life Insurance Company Texas 100%
Peninsular Life Insurance Company Florida 100%
PennCorp Life Insurance Company Ontario, Canada 100%
Pennsylvania Life Insurance Company Pennsylvania 100%
PFI, Inc. Delaware 100%
Union Bankers Insurance Company Texas 100%
WorldNet Services Corp. Florida 100%
23(a) Consent of Ernst & Young LLP
(B) REPORTS ON FORM 8-K
None
45
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March 2001.
UNIVERSAL AMERICAN FINANCIAL CORP.
(Registrant)
By: /s/ Richard A. Barasch
Richard A. Barasch
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 30, 2001 by the following persons in
the capacities indicated:
Signatures Title
/s/ Richard A. Barasch Chairman of the Board, President,
Richard A. Barasch Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Robert A. Waegelein Senior Vice President and Chief
Robert A. Waegelein Financial Officer
(Principal Accounting Officer)
/s/ Bradley E. Cooper Director
Bradley E. Cooper
/s/ Susan S. Fleming Director
Susan S. Fleming
/s/ Mark M. Harmeling Director
Mark M. Harmeling
/s/ Bertram Harnett Director
Bertram Harnett
/s/ Patrick J. McLaughlin Director
Patrick J. McLaughlin
/s/ Robert A. Spass Director
Robert A. Spass
/s/ Richard Veed Director
Richard Veed
/s/ Robert F. Wright Director
Robert Wright
46
47
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES OF THE REGISTRANT:
Independent Auditors' Reports F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations
for the Three Years Ended December 31, 2000 F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for the Three Years Ended December 31, 2000 F-5
Consolidated Statements of Cash Flows
for the Three Years Ended December 31, 2000 F-6
Notes to Consolidated Financial Statements F-7
Schedule I -- Summary of Investments - other than investments in related parties
(incorporated in Note 5 to Consolidated Financial Statements)
Schedule II -- Condensed Financial Information of Registrant F-35
Notes to Condensed Financial Information F-38
Schedule III -- Supplementary Insurance Information F-39
Schedule IV -- Reinsurance (incorporated in Note 11 of Notes to Consolidated Financial Statements)
Other schedules were omitted because they were not applicable
48
Independent Auditors' Report
The Board of Directors and Stockholders
Universal American Financial Corp.:
We have audited the accompanying consolidated balance sheets of Universal
American Financial Corp. and subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2000. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Universal American Financial Corp. and subsidiaries at December 31, 2000 and
1999 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Ernst & Young LLP
New York, New York
February 23, 2001
F-2
49
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
ASSETS 2000 1999
---------- ----------
Investments (Notes 2c and 5):
Fixed maturities available for sale, at fair value
(amortized cost: 2000, $746,060; 1999, $734,466) $ 751,738 $ 717,560
Equity securities, at fair value (cost: 2000, $3,819; 1999, $5,120) 3,547 4,838
Policy loans 25,077 25,640
Other invested assets 4,318 5,506
---------- ----------
Total investments 784,680 753,544
---------- ----------
Cash and cash equivalents 40,250 58,753
Accrued investment income 11,459 11,506
Deferred policy acquisition costs (Note 2d) 48,651 34,943
Amounts due from reinsurers (Note 11) 202,929 196,960
Due and unpaid premiums 3,680 3,578
Deferred income tax asset (Note 6) 65,014 70,968
Goodwill (Note 2o) 6,712 4,201
Present value of future profits 5,802 1,226
Other assets 20,687 17,742
---------- ----------
Total assets 1,189,864 1,153,421
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances (Note 2e) 223,681 238,665
Reserves for future policy benefits 575,239 560,777
Policy and contract claims - life 7,207 5,644
Policy and contract claims - health 77,884 72,261
Loan payable (Note 12) 69,650 70,000
Amounts due to reinsurers 2,877 85
Restructuring liability (Note 4) 2,955 9,980
Negative goodwill (Note 2o and 4) 1,944 9,622
Other liabilities 54,478 52,422
---------- ----------
Total liabilities 1,015,915 1,019,456
---------- ----------
Commitments and contingencies (Note 13)
STOCKHOLDERS' EQUITY (Note 8)
Common stock (Authorized: 80 million shares, issued and outstanding:
2000, 46.8 million shares; 1999, 45.9 million shares) 468 459
Additional paid-in capital 128,625 122,924
Accumulated other comprehensive income/(loss) 4,875 (6,887)
Retained earnings 40,354 17,469
Less: Treasury Stock (0.1 million shares) (373) --
---------- ----------
Total stockholders' equity 173,949 133,965
---------- ----------
Total liabilities and stockholders' equity
$1,189,864 $1,153,421
---------- ----------
See notes to consolidated financial statements.
F-3
50
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
REVENUE: 2000 1999 1998
-------- -------- --------
(In thousands, per share amounts in dollars)
Gross premiums and policyholder fees earned $451,323 $252,553 $131,044
Reinsurance premiums assumed 3,055 1,751 998
Reinsurance premiums ceded (234,625) (138,827) (89,546)
-------- -------- --------
Net premiums and policyholder fees earned (Note 11) 219,753 115,477 42,496
Net investment income (Note 5) 56,945 29,313 10,721
Realized gains/(losses) on investments (Note 5) 146 (241) 256
Fee and other income 7,247 3,587 2,616
-------- -------- --------
Total revenues 284,091 148,136 56,089
-------- -------- --------
BENEFITS, CLAIMS AND OTHER DEDUCTIONS:
Net increase in future policy benefits 6,968 357 5,356
Claims and other benefits 146,951 72,898 25,638
Interest credited to policyholders 10,130 8,668 7,240
Net increase in deferred acquisition costs (15,925) (6,229) (3,530)
Amortization of present value of future profits 3,096 343 174
Amortization of goodwill/negative goodwill (347) (273) 171
Commissions 82,903 46,624 27,147
Other operating costs and expenses 87,006 48,658 21,181
Commission and expense allowances
on reinsurance ceded (69,757) (38,966) (31,220)
-------- -------- --------
Total benefits, claims and other deductions 251,025 132,080 52,157
-------- -------- --------
Operating income before taxes 33,066 16,056 3,932
Federal income tax expense (Note 6) 10,181 6,243 1,324
Net income 22,885 9,813 2,608
Redemption accrual on Series C and Series D Preferred
Stock (Note 7) -- 180 434
-------- -------- --------
Net Income applicable to common shareholders $ 22,885 $ 9,633 $ 2,174
-------- -------- --------
Earnings per common share (Note 2k):
Basic $0.49 $0.42 $0.29
-------- -------- --------
Diluted $0.49 $0.34 $0.20
-------- -------- --------
See notes to consolidated financial statements
F-4
51
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(IN THOUSANDS)
Accumulated
Series B Additional Other
Preferred Common Paid-In Comprehensive Retained Treasury
Stock Stock Capital Income/(Loss) Earnings Stock Total
----- ----- ------- ------------- -------- ----- -----
Balance, January 1, 1998 $ 4,000 $ 73 $ 15,993 $ 842 $ 4,799 - $ 25,707
Net income - - - - 2,608 - 2,608
Redemption accrual on
Series C Preferred Stock - - - - (434) - (434)
Other comprehensive income
(Note 21) - - - 16 - - 16
--------
Comprehensive income - 2,190
--------
Issuance of common stock (Note 8) - 3 525 - - - 528
Issuance of Series D
Preferred Stock - - (107) - - - (107)
------- ---- -------- ------ ------- ----- --------
Balance, December 31,1998 4,000 76 16,411 858 6,973 - 28,318
Net income - - - - 9,813 - 9,813
Redemption accrual on
Series C Preferred Stock - - - - (180) - (180)
Other comprehensive income
(Note 21) - - - (7,745) - - (7,745)
--------
Comprehensive income - 1,888
--------
Issuance of common stock (Note 8) - 383 89,927 - - - 90,310
Preferred Stock Conversion (Note 7) (4,000) - 13,142 - 863 - 10,005
Stock compensation (Note 3 and 9) - - 4,411 - - - 4,411
Loans to officers (Note 7) - - (967) - - - (967)
------- ---- -------- ------ ------- ----- --------
Balance, December 31,1999 - 459 122,924 (6,887) 17,469 - 133,965
------- ---- -------- ------ ------- ----- --------
Net income - - - - 22,885 - 22,885
Other comprehensive income
(Note 21) - - - 11,762 - - 11,762
--------
Comprehensive income - - - - - - 34,647
--------
Issuance of common stock (Note 8) - 9 3,289 - - - 3,298
Stock compensation (Note 3 and 9) - - 2,388 - - - 2,388
Loans to officers (Note 7) - - 13 - - - 13
Treasury shares purchased, at cost
(Note 8) - - - - - (711) (711)
Treasury shares reissued (Note 8) - - 11 - - 338 349
------- ---- -------- ------ ------- ----- --------
Balance, December 31, 2000 $ - $468 $128,625 $4,875 $40,354 $(373) $173,949
======= ==== ======== ====== ======= ===== ========
See notes to consolidated financial statements.
F-5
52
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Years Ended December 31, 2000
2000 1999 1998
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 22,885 $ 9,813 $ 2,608
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Deferred income taxes 7,011 996 1,324
Change in reserves for future policy benefits (net of balances 3,142 5,136 6,928
acquired)
Change in policy and contract claims (net of balances acquired) 7,185 (2,229) (270)
Change in deferred policy acquisition costs (15,925) (6,253) (3,530)
Change in deferred revenue (net of balances acquired) (32) (45) (63)
Amortization of present value of future profits 3,096 343 175
Amortization of goodwill (347) (273) 154
Change in policy loans (net of balances acquired) 563 264 (91)
Change in accrued investment income (net of balances acquired) (410) (336) (181)
Change in reinsurance balances (net of balances acquired) 1,155 (5,571) (5,320)
Change in due and unpaid premium (net of balances acquired) (102) 187 22
Realized loss/(gain) on investments (146) 241 (256)
Change in restructuring liability (7,025) 9,980 --
Change in income taxes payable (net of balances acquired) 1,711 11,565 --
Other, net (3,178) (5,150) (1,874)
--------- --------- --------
Net cash provided by/(used in) operating activities 19,583 18,668 (374)
--------- --------- --------
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for sale 104,046 41,039 26,887
Proceeds from redemption of fixed maturities available for sale 9,131 12,405 7,941
Cost of fixed maturities purchased available for sale (127,255) (182,843) (45,886)
Change in amounts held in trust for reinsurer (3,105) (2,403) (5,182)
Proceeds from sale of equity securities 1,896 374 512
Cost of equity securities purchased (534) (144) (591)
Change in mortgage loans 462 2,870 --
Change in other invested assets 696 2,079 (108)
Purchase of business, net of cash acquired (6,365) (9,620) (2,563)
--------- --------- --------
Net cash used by investing activities (21,028) (136,243) (18,990)
--------- --------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock 213 93,209 421
Cost of treasury stock purchases (711) -- --
Proceeds from the issuance of Series D Preferred Stock -- 1,750 2,250
Increase/(decrease) in policyholder account balances (16,210) (974) 7,522
Increase in loan payable 3,000 70,000 1,850
Principle repayment on loan payable (3,350) (4,750) (600)
--------- --------- --------
Net cash provided from financing activities (17,058) 159,235 11,443
--------- --------- --------
Net (decrease) increase in cash and cash equivalents (18,503) 41,660 (7,921)
--------- --------- --------
Cash and cash equivalent at beginning of year 58,753 17,093 25,014
--------- --------- --------
Cash and cash equivalent at end of year $ 40,250 $ 58,753 $ 17,093
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid (received) during
the year for:
Interest $ 7,097 $ 2,859 $ 307
========= ========= ========
Income taxes $ (3,375) $ 2,335 $ --
========= ========= ========
See notes to consolidated financial statements.
F-6
53
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND COMPANY BACKGROUND:
Universal American Financial Corp. ("the Company" or "Universal
American") was incorporated in the State of New York in 1981 as a life and
accident & health insurance holding company. Until July 30, 1999, the Company
had three principal subsidiaries: American Progressive Life & Health Insurance
Company of New York ("American Progressive"), American Pioneer Life Insurance
Company ("American Pioneer"), American Exchange Life Insurance Company
("American Exchange"), in addition to WorldNet Services Corp. ("WorldNet") and
Quincy Coverage Corp. ("Quincy"). On July 30, 1999, Universal American acquired
all of the outstanding shares of common stock of certain direct and indirect
subsidiaries of PennCorp Financial Group ("PFG"), including the following six
insurance companies (the "Acquired Companies"): Pennsylvania Life Insurance
Company ("Pennsylvania Life"), Peninsular Life Insurance Company ("Peninsular"),
Union Bankers Insurance Company ("Union Bankers"), Constitution Life Insurance
Company ("Constitution"), Marquette National Life Insurance Company
("Marquette") and PennCorp Life Insurance Company, a Canadian company ("PennCorp
Canada"). On January 2, 2000, Universal American acquired American Insurance
Administration Group, Inc. ("AIAG") and on August 10, 2000, Universal American
acquired Capitated Healthcare Services, Inc. ("CHCS").
Universal American is a life and accident and health insurance holding
company whose principal insurance subsidiaries have operated through a general
agency system, marketing and underwriting products aimed at the senior market,
including Medicare supplement, long-term care, home health care, life insurance
and annuities. With the acquisition of Pennsylvania Life and PennCorp Canada,
the Company has expanded its issuance of fixed benefit accident and health
insurance products. The acquisition expanded the Company's general agency system
and provided a new distribution system consisting of career agents. The career
agent distribution system operates through a network of regional managers that
operate branch offices throughout the United States and Canada and are under
exclusive contract with Pennsylvania Life and PennCorp Canada. Universal
American, through its acquisitions of AIAG and CHCS in 2000, has expanded its
insurance services segment to include independent third party administrative
service contracts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BASIS OF PRESENTATION: The significant accounting policies
followed by Universal American and subsidiaries that
materially affect financial reporting are summarized below.
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") which, as to the
insurance subsidiaries, differ from statutory accounting
practices prescribed or permitted by regulatory authorities.
The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date
of the financial statements and the reported revenues and
expenses during the reporting period. Accounts that the
Company deems to be sensitive to changes in estimates include
policy liabilities and accruals, deferred policy acquisition
costs, present value of future profits and deferred taxes. As
additional information becomes available or actual amounts
become determinable, the recorded estimates may be revised and
reflected in operating results. Actual results could differ
from those estimates.
b. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated
financial statements include the accounts of Universal
American its wholly-owned subsidiaries, including the
operations of acquired companies from the date of their
acquisition. All material intercompany transactions and
balances have been eliminated.
F-7
54
c. INVESTMENTS: Investments are shown on the following bases:
The Company follows Financial Accounting Standards Board
("FASB") Statement No. 115, "Accounting for Certain Debt and
Equity Securities" ("Statement No. 115"). Statement No. 115
requires that debt and equity securities be classified into
one of three categories and accounted for as follows: Debt
securities that the Company has the positive intent and the
ability to hold to maturity are classified as "held to
maturity" and reported at amortized cost. Debt and equity
securities that are held for current resale are classified as
"trading securities" and reported at fair value, with
unrealized gains and losses included in earnings. Debt and
equity securities not classified as held to maturity or as
trading securities are classified as "available for sale" and
reported at fair value. Unrealized gains and losses on
available for sale securities are excluded from earnings and
reported as accumulated other comprehensive income, net of tax
and deferred policy acquisition cost adjustments.
As of December 31, 2000 and 1999, all fixed maturity
securities were classified as available for sale and were
carried at fair value, with the unrealized gain or loss, net
of tax and other adjustments (deferred policy acquisition
costs), included in accumulated other comprehensive income.
Equity securities are carried at current fair value. Policy
loans are stated at the unpaid principal balance. Short-term
investments are carried at cost, which approximates fair
value. Other invested assets include real estate, mortgage
loans and collateral loans. The real estate and collateral
loans are carried at cost which is equal to the fair value of
their estimated future cash flows at the date of acquisition.
Mortgage loans are carried at the unpaid principal balance.
Investment income is recorded when earned.
The Company regularly evaluates the carrying value of their
investments based on current economic conditions, past credit
loss experience and other circumstances. A decline in net
realizable value that is other than temporary is recognized as
a realized investment loss and a reduction in the cost basis
of the investment in the period when such determination is
made. The Company discounts expected cash flows in the
computation of net realizable value of its investments, other
than certain mortgage-backed securities. In those
circumstances where the expected cash flows of residual
interest and interest-only mortgage-backed securities,
discounted at a risk-free rate of return, result in an amount
less than the carrying value, a realized loss is reflected in
an amount sufficient to adjust the carrying value of a given
security to its fair value. Realized investment gains and
losses on the sale of securities are based on the specific
identification method.
d. DEFERRED POLICY ACQUISITION COSTS: The cost of acquiring new
business, principally commissions and certain expenses of the
agency, policy issuance and underwriting departments, all of
which vary with, and are primarily related to the production
of new and renewal business, have been deferred. These costs
are being amortized in relation to the present value of
expected gross profits on the policies arising principally
from investment, mortality and expense margins for FASB
Statement No. 97, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments",
("Statement No. 97") products and in proportion to premium
revenue using the same assumptions used in estimating the
liabilities for future policy benefits for FASB Statement No.
60, "Accounting and Reporting by Insurance Enterprises",
("Statement No. 60") products. Deferred policy acquisition
costs are written off to the extent that it is determined that
future policy premiums and investment income or gross profits
would not be adequate to cover related losses and expenses.
During the year ended December 31, 2000, the Company decided
to exit the major medical line of business. This resulted in a
reduction in the projected gross profits for that line of
business and accordingly, deferred acquisition costs of $1.4
million were written off as of December 31, 2000. No deferred
policy acquisition costs were written off for the years ended
December 31, 2000, 1999 and 1998.
F-8
55
The Company has several reinsurance arrangements in place on
its life and accident & health insurance risks (see Note 11).
In the accompanying statement of operations, the Company
reports commissions incurred on direct premium written and
commission and expense allowances on reinsurance ceded on
separate lines to correspond to the presentation of the
premiums earned by the Company. In determining the amounts
capitalized for deferred acquisition costs, the Company
includes an amount for gross commissions and direct issue
expenses, net of the related allowances received from the
reinsurer on these costs.
Details with respect to deferred policy acquisition costs for
the three years ended December 31, 2000 are as follows:
(Amounts in thousands)
Balance at January 1, 1998 $20,832
Capitalized costs 8,792
Adjustment relating to unrealized gain/(loss) on fixed maturities (79)
Amortization (5,262)
-------
Balance at December 31, 1998 24,283
Capitalized costs 11,441
Adjustment relating to unrealized gain/ (loss) on fixed maturities 4,509
Foreign currency adjustment 24
Amortization (5,314)
-------
Balance at December 31, 1999 34,943
Capitalized costs 24,200
Adjustment relating to unrealized gain/(loss) on fixed maturities (2,209)
Foreign currency adjustment (8)
Amortization (6,866)
Adjustment relating to the decision to exit the major medical line
of business (1,409)
-------
Balance at December 31, 2000 $48,651
=======
e. RECOGNITION OF REVENUES, CONTRACT BENEFITS AND EXPENSES FOR
INVESTMENT AND UNIVERSAL AMERICAN LIFE TYPE POLICIES: Revenues
for Universal American life-type policies and investment
products consist of mortality charges for the cost of
insurance and surrender charges assessed against policyholder
account balances during the period. Benefit claims incurred in
excess of policyholder account balances are expensed. The
liability for policyholder account balances for Universal
American life-type policies and investment products under
Statement No. 97 are determined following a "retrospective
deposit" method. The retrospective deposit method establishes
a liability for policy benefits at an amount determined by the
account or contract balance that accrues to the benefit of the
policyholder, which consists principally of policy account
values before any applicable surrender charges. Premium
receipts are not reported as revenues when the retrospective
deposit method is used. Current credited interest rates for
these products range from 3.0% to 7.3%.
f. RECOGNITION OF PREMIUM REVENUES AND POLICY BENEFITS FOR
ACCIDENT & HEALTH INSURANCE PRODUCTS: Premiums are recorded
when due and recognized as revenue over the period to which
the premiums relate. Benefits and expenses associated with
earned premiums are recognized as the related premiums are
earned so as to result in recognition of profits over the life
of the policies. This association is accomplished by recording
a provision for future policy benefits and amortizing deferred
policy acquisition costs. The liability for future policy
benefits for accident & health policies consists of active
life reserves and the estimated present value of the remaining
ultimate net cost of incurred claims. Active life reserves
include unearned premiums and additional reserves. The
additional reserves are computed on the net level premium
method using assumptions for future investment yield,
mortality and morbidity experience. The assumptions are based
on past experience. Claim reserves are established for future
payments not yet due on incurred claims, primarily relating to
individual disability insurance and group long-term disability
insurance products. These reserves are established based on
past experience and are continuously reviewed and updated with
F-9
56
any related adjustments recorded to current operations. Claim
liabilities represent policy benefits due but unpaid at
year-end and primarily relates to individual health insurance
products.
Activity in the accident & health policy and contract claim
liability is as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Balance at beginning of year $72,261 $24,332 $22,592
Less reinsurance recoverables (36,231) (19,076) (17,034)
------- ------- -------
Net balance at beginning of year 36,030 5,256 5,558
------- ------- -------
Balances acquired - 31,043 785
Incurred related to:
Current year 59,700 58,163 18,044
Prior years 299 (395) (782)
------- ------- -------
Total incurred 59,999 57,768 17,262
------- ------- -------
Paid related to:
Current year 43,843 28,782 13,673
Prior years 17,631 29,320 4,676
------- ------- -------
Total paid 61,474 58,102 18,349
Foreign currency adjustment (173) 65 -
------- ------- -------
Net balance at end of year 34,382 36,030 5,256
Plus reinsurance recoverables 43,502 36,231 19,076
------- ------- -------
Balance at end of year $77,884 $72,261 $24,332
======= ======= =======
In 2000, the Company experienced unfavorable development on
it's prior year accident and health losses, relating primarily
to the major medical line of business. Losses incurred related
to prior years developed favorably in 1999 and 1998 due
primarily to the fact that healthcare trends were lower than
those anticipated when the reserves were established.
g. RECOGNITION OF PREMIUM REVENUES AND POLICY BENEFITS FOR
TRADITIONAL LIFE AND ANNUITY PRODUCTS: Premiums from
traditional life and annuity policies with life contingencies
generally are recognized as income when due. Benefits and
expenses are matched with such income so as to result in the
recognition of profits over the life of the contracts. This
match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and
subsequent amortization of policy acquisition costs.
h. INCOME TAXES: The Company's method of accounting for income
taxes is the asset and liability method. Under the asset and
liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date of a change in
tax rates.
i. REINSURANCE ACCOUNTING: Recoverables under reinsurance
contracts are included in total assets as amounts due from
reinsurers rather than net against the related policy asset or
liability. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those
used to account for the underlying policies.
F-10
57
j. FOREIGN CURRENCY TRANSLATION: The financial statement accounts
of the Company's Canadian operations, which are denominated in
Canadian dollars, are translated into U.S. dollars as follows:
(i) Canadian currency assets and liabilities are translated at
the rates of exchange as of the balance sheet dates and the
related unrealized translation adjustments are included as a
component of accumulated other comprehensive income, and (ii)
revenues, expenses and cash flows, expressed in Canadian
dollars, are translated using a weighted average of exchange
rates for each period presented.
k. EARNINGS PER COMMON SHARE: Basic EPS excludes dilution and is
computed by dividing income available to common shareholders,
(after deducting the redemption accrual on the Series C and
Series D Preferred Stock), by the weighted average number of
shares outstanding for the period. Diluted EPS gives the
dilutive effect of the stock options, warrants and Series B, C
and D Preferred Stock outstanding during the year. As of
December 31, 2000 and 1999, there were 2,513,100 and 2,479,500
stock options, respectively, not included in the diluted EPS
computation because they were antidilutive. A reconciliation
of the numerators and the denominators of the basic and
diluted EPS for the years ended December 31, 2000, 1999 and
1998 as follows:
For the Year Ended December 31, 2000
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands, per share amounts in dollars)
Common stock outstanding 46,761
Less: Treasury shares (31)
------
Basic EPS
Net income applicable to common shareholders $22,885 46,730 $0.49
=====
Effect of Dilutive Securities
Incentive stock options 1,766
Director stock option 115
Treasury stock purchased from proceeds of
exercise
of options (1,496)
------- ------
Diluted EPS
Net income applicable to common
Shareholders plus assumed conversions $22,885 47,115 $0.49
======= ====== =====
For the Year Ended December 31, 1999
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands, per share amounts in dollars)
Net income $9,813
Less: Redemption accrual on Series C preferred Stock (180)
------
Basic EPS
Net income applicable to common shareholders 9,633 23,212 $ 0.42
======
Effect of Dilutive Securities
Series B Preferred Stock 1,037
Series C Preferred Stock 180 544
Series D Preferred Stock 744
Non-registered warrants 1,993
Registered warrants 614
Incentive stock options 1,261
Director stock option 93
Treasury stock purchased from proceeds of
exercise
of options and warrants (937)
------ -----
Diluted EPS
Net income applicable to common
Shareholders plus assumed conversions $9,813 28,561 $ 0.34
====== ====== ======
F-11
58
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands, per share amounts in dollars)
Net income $2,608
Less: Redemption accrual on Series C Preferred Stock (434)
------
Basic EPS
Net income applicable to common shareholders 2,174 7,533 $0.29
=====
Effect of Dilutive Securities
Series B Preferred Stock 1,778
Series C Preferred Stock 434 2,176
Series D Preferred Stock -
Non-registered warrants 2,016
Registered warrants 658
Incentive stock options 229
Director stock option 7
Treasury stock purchased from proceeds of
exercise of options and warrants (1,241)
------ ------
Diluted EPS
Net income applicable to common
Shareholders plus assumed conversions $2,608 13,156 $0.20
====== ====== =====
l. OTHER COMPREHENSIVE INCOME: The components of other comprehensive
income, and the related tax effects for each component, for the year
ended December 31, 2000, 1999 and 1998 are as follows:
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Year ended December 31, 2000
Net unrealized gain arising during
the year (net of deferred acquisition costs) $20,531 $7,498 $13,033
Reclassification adjustment for gainss
included in net income (146) (51) (95)
------- ------ -------
Net unrealized gains 20,385 7,447 12,938
Foreign currency translation adjustment (1,434) (258) (1,176)
------- ------ -------
Other comprehensive income $18,951 $7,189 $11,762
======= ====== =======
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Year ended December 31, 1999
Net unrealized loss arising during
the year (net of deferred acquisition costs) $(15,293) $(6,202) $(9,091)
Reclassification adjustment for losses
included in net income 87 35 52
-------- -------- -------
Net unrealized gains (15,206) (6,167) (9,039)
Foreign currency translation adjustment 2,177 883 1,294
-------- -------- -------
Other comprehensive income (loss) $(13,029) $ (5,284) $(7,745)
======== ======== =======
F-12
59
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount
------ --------- ------
(In thousands)
Year ended December 31, 1998
Net unrealized gain arising during
the year (net of deferred acquisition costs) $171 $ 55 $116
Reclassification adjustment for gains
included in net income (147) (47) (100)
---- ---- ----
Net unrealized gains 24 8 16
Foreign currency translation adjustment - - -
---- ---- ----
Other comprehensive income $ 24 $ 8 $ 16
==== ==== ====
m. CASH FLOW INFORMATION: Included in cash and cash equivalents
are cash on deposit, money market funds, and short term
investments which had an original maturity of three months or
less from the time of purchase.
n. FASB STATEMENT NO. 133: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities. Its amendments
Statements 137, Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 and 138, Accounting for Derivative
Instruments and Certain Hedging Activities, were issued in
June, 1999 and June, 2000, respectively. (Collectively these
are referred to as Statement 133). Statement 133 establishes
accounting and reporting standards for derivative instruments
and is effective for fiscal years beginning after June 15,
2000. Because of the minimal use of derivatives, Management
does not anticipate that the adoption will have a significant
effect on earnings or the financial position of the Company.
O. GOODWILL/NEGATIVE GOODWILL: Business combinations accounted
for as a purchase result in the allocation of the purchase
consideration to the fair values of the assets and liabilities
acquired, including the present value of future profits,
establishing such fair values as the new accounting bases.
Purchase consideration in excess of the fair value of net
assets acquired, for a specific acquisition, is allocated to
goodwill. Should the fair value of the net assets acquired
exceed the purchase consideration, such excess is utilized to
reduce certain intangible assets, primarily present value of
future profits related to the specific acquisition, and any
remaining excess is allocated to negative goodwill. Allocation
of purchase price is performed in the period in which the
purchase is consummated. Adjustments, if any, in subsequent
periods relate to resolution of pre-acquisition contingencies
and refinements made to estimates of fair value in connection
with the preliminary allocation.
In connection with the acquisition of First National in 1996,
the Company recorded $3.5 million of goodwill, which is being
amortized on a straight line basis over 30 years. In
connection with the acquisition of American Exchange in 1997,
the Company recorded $1.3 million of goodwill, which is also
being amortized on a straight line basis over 30 years. In
connection with the acquisition of CHCS in August 2000, the
Company recorded $2.7 million of goodwill, which is being
amortized on a straight line basis over 20 years.
Negative Goodwill relates to the 1999 Acquisition and is being
amortized over 10 years on a straight-line basis. (see Note
3).
p. RECLASSIFICATIONS: Certain reclassifications have been made to
prior years' financial statements to conform to current period
classifications.
3. BUSINESS COMBINATION
1999 Acquisition
F-13
60
On July 30, 1999, Universal American acquired all of the outstanding
shares of common stock of certain direct and indirect subsidiaries of PennCorp
Financial Group ("PFG"), including six insurance companies (the "Acquired
Companies") and certain other assets as follows (the "1999 Acquisition"). The
Acquired Companies are:
Name of Insurance Company State or Province of Domicile
------------------------- -----------------------------
Pennsylvania Life Insurance Company Pennsylvania
Peninsular Life Insurance Company Florida
Union Bankers Insurance Company Texas
Constitution Life Insurance Company Texas
Marquette National Life Insurance Company Texas
PennCorp Life Insurance Company of Canada Ontario, Canada
The purchase price of $130.5 million in cash was financed with $92.8
million of proceeds generated from the UA Purchase Agreement described in Note 7
and from the term loan portion of an $80 million credit facility entered into on
July 30, 1999 consisting of a $70 million term loan and a $10 million revolving
loan facility (see Note 12). None of the revolving loan facility was drawn at
closing. The proceeds of the financing in excess of the $130.5 million purchase
price were used to pay transaction costs of the acquisition and the financing,
to retire an existing Universal American bank loan, to contribute to the surplus
of Pennsylvania Life and for working capital.
The 1999 Acquisition was accounted for using the purchase method and,
accordingly, the operating results generated by the acquired companies after
July 30, 1999 are included in Universal American's consolidated financial
statements. In addition to the purchase price, the Company incurred costs
totaling $18.3 million, including a restructuring accrual of $11.1 million and
$3.8 million of stock compensation cost related to shares purchased by agents
and certain members of management at discounted prices from the market. At the
time of closing, the fair value of net assets of the acquired companies amounted
to $151.7 million resulting in a negative goodwill amount of $2.9 million, which
is being amortized on a straight line basis over a ten year period (see Note
2o).
The consolidated pro forma results of operations, assuming that the
companies described above were purchased on January 1, 1999 is as follows:
Year Ended
December 30,1999
----------------
(In thousands)
Total revenue $274,805
Operating income before taxes $ 32,279
Net income $ 18,763
Earnings per common share:
Basic $ 0.44
Diluted $ 0.41
In January 2000, the Company announced that it had approved a plan to
consolidate the Raleigh location acquired in the 1999 Acquisition into its
locations in Toronto (Canada), Pensacola (Florida) and Orlando (Florida) in
order to improve operating efficiencies and capabilities. The plan to
consolidate this location was being formed at the date of the acquisition and
was approved by the Board of Directors. Accordingly, the Company recorded an
$11.1 million restructuring liability in its accounting for the 1999
Acquisition. These restructuring costs were accounted for under EITF No 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination"
("EITF 95-3").
As of December 31, 2000, the remaining liability consisted of employee
separation costs ($1.6 million), employee relocation costs ($1.0 million) and
other relocation and exit costs ($0.4 million).
4. ACQUISITION OF INSURANCE SERVICE COMPANIES
Acquisition of American Insurance Administration Group, Inc. ("AIAG")
F-14
61
In January 2000, Universal American acquired all of the outstanding
shares of AIAG, a privately held third party administrator located in
Clearwater, Florida, for $5.8 million, including $2.9 million in cash and
809,860 shares of Universal American common stock. AIAG is a third party
administrator of approximately $125 million of senior supplemental health
insurance. Approximately $96 million of in-force premium is administered for
Union Bankers and Constitution Life, for which AIAG received administrative fees
of $7.6 million and $8.1 million in 2000 and 1999, respectively. This
acquisition has generated increased cash flow and strengthened the Company's
administrative capabilities while it expands its presence in the senior market
and initiates cross-selling opportunities between the Company's Brokerage and
Career Sales Divisions.
The fair value of the net assets acquired was $(0.9) million. The
excess of the purchase price over the fair value of net assets acquired
represents the present value of future profits ("PVFP"), net of deferred taxes,
relating to contracts existing at the date of purchase. The PVFP was determined
using a discount rate of 15%. It is being amortized in proportion to the
expected profits from the contracts in force on the date of acquisition. A large
portion of the contracts had a remaining term of three years at the date of
acquisition; accordingly, the amortization is heavily weighted to those periods.
During 2000, approximately $2.8 million or 37% of the original balance was
amortized.
Acquisition of CHCS, Inc. ("CHCS")
In August 2000, Universal American acquired all of the outstanding
shares of CHCS, a privately held third party administrator located in Weston,
Florida, for $4.6 million, including $3.3 million in cash, 64,820 shares on
Universal American common stock and future cash payments totaling $1.0 million
over 18 months. CHCS is a third party administrator of long-term care and home
health care insurance products for over 35 unaffiliated insurance companies. For
the five months ended December 31, 2000, CHCS received administrative fees of
$2.4 million on contracts with expected annual fees for the year 2001 of $6.5
million.
The fair value of the net assets acquired was $1.9 million. The excess
of the purchase price over the fair value of the net assets acquired was
assigned to goodwill (see Note 2o).
F-15
62
5. INVESTMENTS:
As of December 31, 2000 and 1999, investments consisted of the
following:
December 31, 2000
----------------------------------------------------------------------
Face Amortized Fair Carrying
Classification Value Cost Value Value
- -------------- ----- ---- ----- -----
(In thousands)
US Treasury bonds and notes $30,730 $ 29,810 $ 30,345 $ 30,345
Corporate bonds 803,559 716,250 721,393 721,393
Equity Securities 3,819 3,547 3,547
-------- -------- --------
Sub-total 749,879 $755,285 755,285
========
Policy loans 25,077 25,077
Other invested assets 4,318 4,318
-------- --------
Total investments $779,274 $784,680
======== ========
December 31, 1999
----------------------------------------------------------------------
Face Amortized Fair Carrying
Classification Value Cost Value Value
- -------------- ----- ---- ----- -----
(In thousands)
US Treasury bonds and notes $31,170 $ 31,776 $ 31,549 $ 31,549
Corporate bonds 791,087 702,690 686,011 686,011
Equity Securities 5,120 4,838 4,838
--------- -------- --------
Sub-total 739,586 $722,398 722,398
========
Policy loans 25,640 25,640
Other invested assets 5,506 5,506
Total investments $770,732 $753,544
======== ========
The amortized cost and fair value of fixed maturities as of December
31, 2000 and 1999 are as follows:
December 31, 2000
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- -------------- ---- ----- ------ -----
(In thousands)
US Treasury securities
and obligations of
US government $ 34,199 $ 589 $ (54) $ 34,734
Corporate debt securities 455,954 7,554 (4,908) 458,600
Mortgage-backed securities 255,907 4,404 (1,907) 258,404
-------- ------- ------- --------
$746,060 $12,547 $(6,869) $751,738
======== ======= ======= ========
F-16
63
December 31, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- -------------- ---- ----- ------ -----
(In thousands)
US Treasury securities
and obligations of
US government $ 63,968 $ 10 $ (587) $ 63,391
Corporate debt securities 446,630 420 (10,693) 436,357
Mortgage-backed securities 223,868 190 (6,246) 217,812
-------- ---- -------- --------
$734,466 $620 $(17,526) $717,560
======== ==== ======== ========
The amortized cost and fair value of fixed maturities at December 31,
2000 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---- -----
(In thousands)
Due in 1 year or less $ 25,666 $ 25,627
Due after 1 year through 5 years 147,112 148,470
Due after 5 years through 10 years 214,263 215,840
Due after 10 years 100,235 100,521
Mortgage-backed securities 258,784 261,280
-------- --------
$746,060 $751,738
======== ========
Included in fixed maturities at December 31, 2000 and 1999 were
securities with carrying values of $33.1 million and $32.5 million,
respectively, held by various states as security for the policyholders of the
Company within such states.
Gross unrealized gains and gross unrealized losses of equity securities
as of December 31, 2000 and 1999 are as follows:
2000 1999
---- ----
(In thousands)
Gross unrealized gains $ - $ 83
Gross unrealized losses (272) (365)
----- -----
Net unrealized losses $(272) $(282)
===== =====
The components of the change in unrealized gains and losses included in
the consolidated statements of stockholders' equity for the three years ended
December 31, 2000 are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Change in net unrealized gains (losses):
Fixed maturities $22,584 $(19,476) $104
Equity securities 10 (239) (1)
Foreign currency (1,434) 2,177 -
Adjustment relating to
Deferred policy acquisition costs (2,209) 4,509 (79)
------- -------- ----
Change in net unrealized gains
(losses) before income tax 18,951 (13,029) 24
Income tax (expense)/benefit (7,189) 5,284 (8)
------- -------- ----
Change in net unrealized gains (losses) $11,762 $ (7,745) $ 16
======= ======== ====
F-17
64
The details of net investment income for the three years ended December
31, 2000 are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Investment Income:
Fixed maturities $52,478 $25,950 $ 9,198
Cash and cash equivalents 1,939 2,454 920
Equity securities 330 157 59
Other 1,380 52 5
Policy loans 1,617 1,004 612
Mortgage loans 214 485 363
------- ------- -------
Gross investment income 57,958 30,102 11,157
Investment expenses 1,013 789 436
------- ------- -------
Net investment income $56,945 $29,313 $10,721
======= ======= =======
Fixed maturities with a carrying value of $0.7 million were non-income
producing for the year ended December 31, 2000.
Gross realized gains and gross realized losses included in the
consolidated statements of operations for the three years ended December 31,
2000 are as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Realized gains:
Fixed maturities $ 1,022 $ 534 $ 1,250
Equity securities 192 2,661 26
------- ------- ------
Total realized gains 1,214 3,195 1,276
------- ------- ------
Realized losses:
Fixed maturities (1,019) (819) (991)
Equity securities (49) (2,617) (29)
------- ------- ------
Total realized losses (1,068) (3,436) (1,020)
------- ------- ------
Net realized gains/(losses) $ 146 $ (241) $ 256
======= ======= ======
During the year ended December 31, 2000 and 1999, the Company wrote
down the value of certain fixed maturity securities by $0.5 million and $0.6
million, respectively, which represents management's estimate of other than
temporary declines in value and was included in net realized gains (losses) on
investments.
For the years ended December 31, 2000 and 1999, the Company held
unrated or less-than-investment grade corporate debt securities with carrying
and estimated fair values as follows:
2000 1999
---- ----
(In thousands)
Carrying value 21,923 $8,040
====== ======
Estimated fair value 21,923 $8,040
====== ======
Percentage of total assets 1.8% 0.7%
====== ======
The holdings of less-than-investment grade securities are widely
diversified and the investment in any one such security is currently less than
$5.9 million, which is approximately 0.5% of total assets.
6. INCOME TAXES:
The Company files a consolidated return for federal income tax
purposes, in which American
F-18
65
Exchange and its subsidiaries and PennCorp Canada are not currently permitted to
be included. American Exchange and its subsidiaries file a separate consolidated
federal income tax return.
The Company's federal income tax expense consisted of:
2000 1999 1998
---- ---- ----
(In thousands)
Current - US $ (126) $ 127 $ -
Current - Canadian 3,296 1,394 -
Deferred - US 7,281 4,078 1,324
Deferred - Canadian (270) 644 -
------- ------ ------
Total tax expense $10,181 $6,243 $1,324
======= ====== ======
A reconciliation of the "expected" tax expense at 35% (34% in 1998)
with the Company's actual tax expense applicable to operating income before
taxes reported in the Consolidated Statements of Operations is as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Expected tax expense $11,573 $5,619 $1,337
Release of valuation allowance (1,343) - -
Canadian taxes (390) 365 -
Other 341 259 (13)
------- ------ ------
Actual tax expense $10,181 $6,243 $1,324
======= ====== ======
In addition to Federal income tax, the Company is subject to state
premium and income taxes, which taxes are included in other operating costs and
expenses in the accompanying statement of operations. Income taxes receivable
for the years ended December 31, 2000 and 1999 totaled $0.2 million and $3.7
million, respectively.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. The tax effects
of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at December 31, 2000 and 1999 are as
follows:
2000 1999
---- ----
(In thousands)
Deferred tax assets:
Reserves for future policy benefits $22,032 $30,637
Deferred policy acquisition costs 19,418 24,582
Net operating loss carryforwards 19,615 19,899
Unrealized losses on investments - 3,873
Investment valuation differences 10,733 7,176
Deferred revenues 1,145 -
AMT credit carryforward 389 262
Other (including restructuring) 4,652 -
------- -------
Total gross deferred tax assets 77,984 86,429
Less valuation allowance (10,385) (11,343)
------- -------
Net deferred tax assets 67,599 75,086
------- -------
Deferred revenues - (1,190)
Present value of future profits (339) (488)
Unrealized gains on investments (2,246) -
Other - (2,440)
------- -------
Total gross deferred tax liabilities (2,585) (4,118)
------- -------
Net deferred tax asset $65,014 $70,968
======= =======
F-19
66
At December 31, 2000, the Company (exclusive of American Exchange and
its subsidiaries and PennCorp Canada) had tax loss carryforwards of
approximately $9.4 million that expire in the years 2005 to 2019. At December
31, 2000, the Company also had an Alternative Minimum Tax (AMT) credit
carryforward for Federal income tax purposes of approximately $0.4 million that
can be carried forward indefinitely. At December 31, 2000, American Exchange and
its subsidiaries had tax loss carryforwards, most of which were incurred prior
to their acquisition by the Company, of approximately $46.7 million that expire
in the years 2007 to 2013. As a result of changes in ownership of the Company in
July 1999, the use of most of the loss carryforwards of the Company are subject
to annual limitations.
At December 31, 2000 and 1999, the Company carried valuation allowances
of $10.4 million and $11.3 million, respectively, with respect to its deferred
tax assets. The Company establishes a valuation allowance based upon an analysis
of projected taxable income and its ability to implement prudent and feasible
tax planning strategies. As a result of the increased profitability of the
Insurance Services segment, valuation allowances on certain of the non-life tax
loss carryforwards were considered not necessary at December 31, 2000. The
amount of the valuation allowance released was $1.3 million and was recorded as
a benefit in the deferred income tax expense. This decrease was offset by the
establishment of a valuation allowance for the purchased net operating losses of
CHCS, which are subject to limitations on their use. Management believes it is
more likely than not that the Company will realize the recorded net deferred tax
assets.
7. EQUITY TRANSACTIONS
Share Purchase Agreement with Capital Z Financial Services Fund II,
L.P.
On December 31, 1998, the Company executed a Share Purchase Agreement
("UA Purchase Agreement") with Capital Z Financial Services Fund II, L.P.
("Capital Z"), which was amended on July 2, 1999. Under the amended agreement,
Capital Z agreed to purchase up to 28,888,888 shares of Universal American
common stock for a purchase price of up to $91.0 million (the "Capital Z
Transaction") subject to adjustment as outlined in the UA Purchase Agreement.
The UA Purchase Agreement received the approvals of the Florida, New York and
Texas Insurance Departments (the states in which Universal American's insurance
subsidiaries prior to the 1999 Acquisition are domiciled). The stockholder
approvals required for the closing of the UA Purchase Agreement were given on
July 27, 1999.
On July 30, 1999, the Capital Z Transaction closed with Capital Z
purchasing 25,707,552 shares of common stock for $80,978,790 ($3.15 per share).
As contemplated by the UA Purchase Agreement, certain members of management and
agents of Universal American and of the companies acquired on July 30, 1999 and
holders of Series C Preferred Stock preemptive rights purchased 3,753,189 shares
of common stock for $11,822,545 ($3.15 per share). The total number of shares
issued amounted to 29,460,741 for total proceeds of $92,801,334. The Company
provided loans to certain members of management to purchase the shares of common
stock. The total amount of the loans of $967,000 was accounted for as a
reduction in paid in capital in the financial statements. The transaction
expenses incurred with the UA Purchase Agreement amounted to $6,963,662 and were
charged to paid-in capital. Included in these transaction expenses was a
transaction fee and expense reimbursement of $5,120,896 paid to an affiliate of
Capital Z, of which $1,375,000 was paid by issuing 436,508 shares of common
stock of the Company ($3.15 per share). In addition, the Company recorded an
expense of $1.7 million to record the difference between the purchase price of
the stock purchased by employees and agents of the Company and the fair value of
the stock on the closing date.
Shareholders' Agreement
Universal American, Capital Z, UAFC L.P. ("AAM") (an unaffiliated
investment firm), Richard Barasch (the Chairman and Chief Executive Officer of
the Company) and several other shareholders of Universal American entered into a
shareholders' agreement on July 30, 1999 (the "Shareholders'
F-20
67
Agreement"). The Shareholders' Agreement requires that all proposed
sales/transfers by the other shareholders who are party to the Shareholders'
Agreement must first be offered to Richard Barasch and Capital Z, including its
affiliates. However, pledges and some other transfers by any party to the
Shareholders' Agreement of less than 1% of Universal American's outstanding
common stock at any one time, or 2.5% when aggregated with the other transfers
by the shareholder and his, her or its permitted transferees of Universal
American's outstanding common stock, are permitted. In addition, Richard Barasch
is not permitted to sell more than 3% of his holdings for a three-year period
beginning July 30, 1999. The Shareholders' Agreement provides for tag-along and
drag-along rights under some circumstances. "Tag-along rights" allow the holder
of stock to include his, her or its stock in a sale of common stock initiated by
another party to the Shareholders' Agreement. "Drag-along rights" permit a
selling party to the Shareholders' Agreement to force the other parties to the
Shareholders' Agreement to sell a proportion of the other holder's shares in a
sale arranged by the selling shareholder.
Under the terms of the Shareholders' Agreement, of the nine members of
Universal American's board of directors, certain shareholders are permitted to
nominate directors as follows: Capital Z: four, Richard Barasch: two, AAM: one
and Universal American: two. Capital Z, Richard Barasch and AAM are each
required to vote for the director(s) nominated by the others. The right of
Richard Barasch to nominate directors is also conditioned upon his continued
employment with Universal American. In addition, the right to nominate directors
is not transferable, except that Capital Z may transfer its right to a
third-party buyer who acquires 10% or more of the outstanding common stock of
Universal American from Capital Z.
Each party to the Shareholders' Agreement has agreed for two years
following the closing not to vote his or its shares in favor of a merger where
Universal American's shareholders would receive consideration other than in the
form of shares of the surviving entity.
Conversion of Preferred Stock
Under the terms of the Series C Preferred Stock, the Company had the
right to require conversion if certain conditions were met, which conditions
were satisfied on March 5, 1999. All of the 51,680 outstanding shares of Series
C Preferred Stock were converted to 2,175,986 shares of common stock on April 1,
1999. As a result of this conversion, the cumulative redemption accrual of $0.8
million was eliminated and credited to retained earnings.
The holders of the Series C Preferred Stock had preemptive rights,
which were triggered by the execution of the UA Purchase Agreement on December
31, 1998, subject to the closing of the sale pursuant to that agreement. On July
30, 1999, 1,159,243 shares were purchased pursuant to these preemptive rights at
a price of $3.15 per share.
As a result of the closing of the Capital Z transaction on July 30,
1999, all of the Series B, D-1 and D-2 Preferred Stock was converted into
1,777,777, 833,333 and 555,556 shares of common stock, respectively.
Exercise of Common Stock Warrants
At December 31, 1998, the Company had 658,231 common stock warrants
issued and outstanding which were registered under the Securities Act of 1933
and 2,015,760 warrants outstanding which were not registered under the
Securities Act of 1933. The warrants had an exercise price to purchase common
stock on a one to one basis at $1.00 and expired on December 31, 1999. During
the year ended December 31, 1999, 650,410 of the registered common stock
warrants and all of the unregistered common stock warrants were exercised for
$2,666,170 resulting in the issuance of 2,666,170 shares of the Company's common
stock.
8. STOCKHOLDERS' EQUITY
Preferred Stock
The Company had 2,000,000 authorized shares of preferred stock to be
issued in series with no shares issued and outstanding at December 31, 2000.
During 1999 all of the outstanding preferred stock
F-21
68
was converted into common stock (see Note 7 for a discussion of the conversion
of previously outstanding Series B, C, D and D-1 Preferred Stock).
Common Stock
The par value of common stock is $.01 per share with 80,000,000 shares
authorized for issuance. The shares issued and outstanding at December 31, 2000
and 1999 were 46,842,170 and 45,914,327, respectively. During the years ended
December 31, 2000 and 1999 and 1998, the Company issued 927,843, 38,276,270 and
312,197 shares, respectively, of its common stock.
Treasury Stock
During 2000, the Board of Directors approved a plan to re-purchase up
to 500,000 shares of Company stock in the open market. The purpose of this plan
is to fund employee stock bonuses. The Company acquired 179,821 shares on the
open market for a cost of $0.7 million during the year at market prices ranging
from $3.69 to $4.13 per share. The Company distributed 86,105 shares at in the
form of officer and employee bonuses at market prices ranging from $4.00 to
$4.09 per share at the date of distribution, generating proceeds of $0.3
million.
9. STOCK BASED COMPENSATION
1998 Incentive Compensation Plan
On May 28, 1998, the Company's shareholders approved the 1998 Incentive
Compensation Plan (the "1998 ICP"). The 1998 ICP superceded the Company's 1993
Incentive Stock Option Plan. Options previously granted under the Company's
Incentive Stock Option Plan will remain outstanding in accordance with their
terms and the terms of the respective plans.
The 1998 ICP provides for grants of stock options, stock appreciation
rights ("SARs"), restricted stock, deferred stock, other stock-related awards,
and performance or annual incentive awards that may be settled in cash, stock,
or other property ("Awards").
The total number of shares of the Company's Common Stock reserved and
available for delivery to participants in connection with Awards under the 1998
ICP is (i) 1.5 million, plus (ii) the number of shares of Common Stock subject
to awards under Preexisting Plans that become available (generally due to
cancellation or forfeiture) after the effective date of the 1998 ICP, plus (iii)
13% of the number of shares of Common Stock issued or delivered by the
Corporation during the term of the 1998 ICP (excluding any issuance or delivery
in connection with Awards, or any other compensation or benefit plan of the
Corporation), provided, however, that the total number of shares of Common Stock
with respect to which incentive stock options ("ISOs") may be granted shall not
exceed 1.5 million. As of December 31, 2000, a total of 6.6 million shares were
eligible for grant under the plan. There were 5.3 million shares reserved for
outstanding Awards under the 1998 ICP and 1.3 million shares reserved for
issuance under future Awards at December 31, 2000.
Executive officers, directors, and other officers and employees of the
Corporation or any subsidiary, as well as other persons who provide services to
the Corporation or any subsidiary, are eligible to be granted Awards under the
1998 ICP, which is administered by the Board or a Committee established pursuant
to the Plan.
The Committee, may, in its discretion, accelerate the exercisability,
the lapsing of restrictions, or the expiration of deferral or vesting periods of
any Award, and such accelerated exercisability, lapse, expiration and vesting
shall occur automatically in the case of a "change in control" of the
Corporation, except to the extent otherwise determined by the Committee at the
date of grant or thereafter.
Stock Awards
F-22
69
In accordance with the 1998 ICP, the Company grants restricted stock to
its officers and non-officer employees. These grants vest upon issue. The
non-officer grants are expensed and awarded in the same year. Officer grants are
accrued for during the year for which they are earned and awarded the following
year. During 2000, the Company awarded 32,290 shares to employees with a fair
value of $4.00 per share. Additionally the Company anticipates issuing
approximately 180,000 shares to officers for 2000 performance based on fair
value of $3.86 per share. During 1999 and 1998, the Company awarded 141,825 and
123,975 shares of restricted stock at weighted average fair values of $4.19 and
$2.50 per share, respectively. The Company recognized compensation expense of
$0.8 million, $0.6 million and $0.3 million, respectively relating to stock
awards for the years ended December 31, 2000, 1999 and 1998.
Options Awards
A summary of the activity relating to the options awarded by the
Company for employees, directors and agents for the three years ended December
31, 2000, is as follows:
Agents & Range of
Employees Directors Others Total Exercise Prices
--------- --------- ------ ----- ---------------
Balance, January 1, 1998 621 36 103 760
Granted 520 86 134 740 $2.25 - $3.25
Exercised (165) (9) -- (174) $0.56 - $1.63
Terminated (13) (4) -- (17) $0.80 - $3.50
----- --- ----- -----
Balance, December 31, 1998 963 109 237 1,309
Granted 2,349 36 736 3,121 $3.09 - $5.31
Exercised (13) (16) -- (29) $1.88 - $3.50
Terminated (13) -- -- (13) $2.00 - $2.25
----- --- ----- -----
Balance, December 31, 1999 3,286 129 973 4,388
Granted 471 51 160 682 $3.15 - $5.06
Exercised (12) (5) -- (17) $2.25 - $3.15
Terminated (375) -- (35) (410) $2.25 - $4.25
----- --- ----- -----
Balance, December 31, 2000 3,370 175 1,098 4,643
===== === ===== =====
At December 31, 2000, 1,576,550, 106,000 and 474,699 options were
currently exercisable by employees, directors and agents, respectively.
Options Granted to Employees
Options are generally granted to eligible employees at a price not less
than the market price of the Company's common stock on the date of the grant.
Option shares may be exercised subject to the terms prescribed by the individual
grant agreement, however, options generally vest 50% after the first year and
50% after the second year. The options must be exercised not later than ten
years after the date of the grant or following earlier termination of
employment. Because these awards are made at a price equal to or greater than
market, no compensation cost is recognized for such awards.
The Company issued 2,260,000 stock options with an exercise price of
$3.15 per share to certain employees and members of management on August 1,
1999. As of December 31, 2000, the number of these options outstanding was
reduced to 1,901,500, primarily through terminations. During 2000, the Company
issued an additional 236,250 stock options with an exercise price of $3.15 per
share to certain relocated employees and members of management on July 31, 2000.
These options generally vest 20% upon grant and 20% each subsequent year.
However, 583,750 vest after seven years, subject to certain criteria, which
could accelerate vesting to five years. These options must be exercised not
later than ten years after the date of the grant or following earlier
termination of employment. In accordance with APB 25, the Company recorded an
expense for the difference between the exercise price of $3.15 per share and the
value of the options on the date of grant of $0.8 million and $1.0 million for
the years ended
F-23
70
December 31, 2000 and 1999, respectively. Additional information with respect to
options granted to employees is as follows:
Stock Options Issued to Directors
Directors of the Company are eligible for options under the 1998 ICP.
The 1998 ICP provides that unless otherwise determined by the Board, each
non-employee director would be granted an option to purchase 4,500 shares of
Common Stock upon approval of the 1998 ICP by shareholders or, as to directors
thereafter elected, his or her initial election to the Board, and at each annual
meeting of shareholders starting in 1999 at which he or she qualifies as a
non-employee director. Unless otherwise determined by the Board, such options
will have an exercise price equal to 100% of the fair market value per share on
the date of grant and will become exercisable in three equal installments after
each of the first, second and third anniversaries of the date of grant based on
continued service as a director. Additional information with respect to the
Company's stock options issued to directors is as follows:
Stock Option Plan for Agents and Others
On December 15, 1995, the Board of Directors approved a plan under
which up to 200,000 options could be granted to agents of the Company's
subsidiaries (subject to insurance law restrictions) and to other persons as to
whom the board of directors believes the grant of such options will serve the
best interests of the Corporation, provided that no options may be granted under
this plan to officers, directors or employees of the Company or of any
subsidiary, while they are serving as such. Such options expire ten years from
the date of the grant. Options outstanding under this plan total 102,786, all of
which are exercisable. In 1998, agents and other persons became eligible for
options under the 1998 ICP. 159,600 and 152,000 options were issued in 2000 and
1999, respectively to agents and others. In accordance with FASB Statement No.
123, "Accounting for Stock Based Compensation," ("FASB 123"), the fair value of
these options totaling $0.2 million and $0.2 million was expensed during 2000
and 1999, respectively. These options vest in equal installments over a three
year period and expire ten years from the date of grant.
In addition, in connection with the acquisition of the Acquired
Companies, the Company adopted additional stock option plans for agents and
regional managers of the Acquired Companies. Agents are to be issued stock and
stock options based on new premium production at predetermined exercise prices.
The plan ends at the earlier of December 31, 2001 or when the aggregate number
of options have been issued. Total options granted may not exceed $0.6 million
of proceeds to be received upon exercise to a maximum of 175,778 options.
Options issued under this plan cliff vest 24 months after the end of the year of
option grant and expire at the earliest of the termination date as an agent or
30 days after the option becomes exercisable. During 1999, a total of 84,254
options were issued to agents of the Acquired Companies related to 1999 sales
performance at an exercise price of $3.62. In accordance with FASB 123, the fair
value of these options was expensed which totaled $0.2 million. These agents
were also eligible for stock grants based on new premium production. Total stock
grants in 1999 totaled 84,254 shares for which the Company recorded an expense
of $0.4 million. During 2000, $0.3 million was expensed relating to the stock
grants and options earned based on 2000 production.
Regional managers will receive options based on growth of new premium
earned. The plan ends at the earlier of December 31, 2001, or when aggregate
numbers of options are issued. Total options to be granted cannot exceed $4.05
million of proceeds to be received upon exercise of such options to a maximum of
1,135,174 options. Options cliff vest on the January 1st following the second
calendar year after the year of option grant. Options issued to regional
managers expire at the earliest of termination as an agent for cause, 30 days
after termination not for cause, or 5 years after the grant date. Total options
issued in 1999 for 1998 performance were 183,055 with an exercise price of
$3.15. Options issued related to 1999 performance totaled 38,397 with an
exercise price of $3.62. In accordance with FASB 123, a total of $0.7 million
was expensed during 1999 representing the fair value of the options issued.
Accounting for Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options.
F-24
71
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
2000 1999 1998
Risk free interest rates 5.11% 6.51% - 6.68% 5.63% - 6.63%
Dividend yields 0.0% 0.0% 0.0%
Expected volatility 21.75% - 43.74% 43.63% - 48.64% 43.74% - 46.08%
Expected lives of options (in years) 1.0 - 4.5 2.0 - 6.0 4.5
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
2000 1999 1998
---- ---- ----
(In thousands)
Pro forma net income $22,360 $8,918 $1,832
======= ====== ======
Pro forma earnings per common share:
Basic $ 0.48 $ 0.39 $ 0.30
Diluted $ 0.47 $ 0.32 $ 0.17
A summary of the status of the Company's three stock option plans as of
December 31, 2000 and 1999, and changes during the years ending on those dates
is presented below:
2000 1999 1998
------------------------ -------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Fixed Exercise Exercise Exercise
Options Options Price Options Price Options Price
- ------- ------- ----- ------- ----- ------- -----
(In thousands) (In thousands) (In thousands)
Outstanding-beginning of
year 4,388 $3.09 1,309 $2.57 760 $2.22
Granted 682 4.30 3,121 3.31 740 2.61
Exercised (17) 2.60 (29) 2.33 (174) 1.49
Terminated (410) 3.18 (13) 2.18 (17) 1.83
----- ----- ----- ----- ----- -----
Outstanding-end of year 4,643 $3.22 4,388 $3.09 1,309 $2.57
----- ----- ----- ----- ----- -----
Options exercisable at end
of year 2,157 $2.90 1,315 $2.69 485 $2.53
F-25
72
A summary of the weighted average fair value of options granted during the years
ended December 31, 2000, 1999 and 1998 is presented below:
2000 1999 1998
----------------------------- -------------------------------- -----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Fair Price Options Fair Price Options Fair Price
------- ---------- ------- ---------- ------- ----------
(In thousands} (In thousands) (In thousands)
Above market 160 $1.34 140 $1.63 - $ -
At market 286 1.72 125 2.01 741 1.12
Below market 236 1.86 2,855 3.02 - -
--- ----- ---
Total granted 682 $1.68 3,120 $2.92 741 $1.12
--- ----- ---
The following table summarizes information about stock options
outstanding at December 31, 2000:
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
(In thousands) (In thousands)
$1.88 - 3.12 1,135 6.3 years $2.51 1,135 $2.51
3.15 2,566 7.8 years 3.15 768 3.15
3.25 - 4.25 640 6.6 years 3.83 207 3.56
5.06 - 5.31 302 4.5 years 5.18 47 5.30
$1.88 - 5.31 4,643 7.1 years $3.22 2,157 $2.90
10. STATUTORY CAPITAL AND SURPLUS REQUIREMENTS AND DIVIDEND RESTRICTIONS:
The Insurance Subsidiaries are required to maintain minimum amounts of
capital and surplus as determined by statutory accounting. Each of the Insurance
Subsidiaries' statutory capital and surplus exceeds its respective minimum
requirement. However, substantially more than such minimum amounts are needed to
meet statutory and administrative requirements of adequate capital and surplus
to support the current level of the Insurance Subsidiaries' operations. At
December 31, 2000 and 1999 the statutory capital and surplus, including asset
valuation reserve, of the U.S. insurance subsidiaries totaled $86.5 million and
$89.2 million, respectively. Total statutory net income for the three years
ended December 31, 2000, 1999 and 1998 was $12.2 million ($14.7 million of which
related to the Acquired Companies), $24.2 million ($25.4 million of which
related to the Acquired Companies) and $0.6 million, respectively.
The National Association of Insurance Commissioners ("NAIC") imposes
regulatory risk-based capital ("RBC") requirements on life insurance
enterprises. At December 31, 2000 all of the Insurance Subsidiaries maintained
ratios of total adjusted capital to RBC in excess of the Authorized Control
Level.
PennCorp Life of Canada and Pennsylvania Life's Canadian Branch
reports to Canadian regulatory authorities based upon Canadian statutory
accounting principles that vary in some respects from U.S. statutory accounting
principles. Canadian net assets based upon Canadian statutory accounting
principles were $56.4 million and $63.9 million as of December 31, 2000 and
1999, respectively. PennCorp Life of Canada maintained a Minimum Continuing
Capital and Surplus Requirement Ratio ("MCCSR") in excess of the minimum
requirement and Pennsylvania Life's Canadian branch maintained a Test of
Adequacy of Assets in Canada and Margin Ratio ("TAAM") in excess of the minimum
requirement at December 31, 2000.
Dividend payments from American Progressive to the Company would
require regulatory approval, which, in all likelihood, would not be obtained
until American Progressive generated enough statutory profits to offset its
entire negative unassigned surplus, which was approximately $8.2 million at
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73
December 31, 2000. American Progressive made no dividends or distributions
during the three years ended 2000.
American Pioneer may pay a dividend or make a distribution without the
prior written approval of the Florida Insurance Department when (a) the dividend
is equal to or less than the greater of (1) 10% of the insurer's surplus as to
policyholders derived from net operating profits on its business and net
realized capital gains ("policyholder surplus from operations"); or (2) the
insurer's entire net operating profits and realized net capital gains derived
during the immediately preceding calendar year but not more than its
policyholder surplus from operations; (b) the insurer will have surplus as to
policyholders equal to or exceeding 115% of the minimum required statutory
surplus as to policyholders after the dividend or distribution is made; and (c)
the insurer has filed notice with the department at least 10 business days prior
to the dividend payment or distribution. American Pioneer did not pay any
dividends during the three years ended December 31, 2000.
Under current Pennsylvania and Texas insurance law, a life insurer may
pay dividends or make distributions out of unassigned surplus without the prior
approval of the Insurance Department as long as the dividend distributions do
not exceed the greater of (i) 10% of the insurer's surplus as to policyholders
as of the preceding December 31st; or (ii) the insurer's net gain from
operations for the immediately preceding calendar year. American Exchange made
no dividends or distributions during the three years ended December 31, 2000.
During the year ended December 31, 2000, Pennsylvania Life and Union Bankers
paid ordinary dividends to American Exchange of $2.9 million and $2.0 million,
respectively. Additionally, Peninsular Life paid an extraordinary dividend of
$1.5 million to Universal American in 2000.
Under current Canadian law, a life insurer may pay a dividend after
such dividend declaration has been approved by its board of directors and upon
at least 10 days prior notification to the Superintendent of Financial
Institutions. In considering approval of a dividend, the board of directors must
consider whether the payment of such dividend would be in contravention of the
Insurance Companies Act of Canada. PennCorp Life did not pay any dividends in
2000.
The Insurance Subsidiaries' statutory basis financial statements are
prepared in accordance with accounting practices prescribed or permitted by
their respective domiciliary states. "Prescribed" statutory accounting practices
include state laws, regulations and general administrative rules, as well as
publications of the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed but are authorized by the
relevant insurance departments; such practices may differ from state to state,
may differ from company to company within a state and may change in the future.
In 1998, the NAIC approved a codification of statutory accounting
principles, effective January 1, 2001, which will serve as a comprehensive and
standardized guide to statutory accounting principles. The adoption of the
codification will change, to some extent, the accounting practices that the
Company's Insurance Subsidiaries use to prepare their statutory financial
statements. The Company does not believe that such changes will have a material
adverse impact on the reported statutory financial condition of any such
subsidiaries.
11. REINSURANCE:
In the normal course of business, the Company reinsures portions of
certain policies that they underwrite to limit disproportionate risks. The
Company is party to several reinsurance agreements on its life and accident &
health insurance risks. The Company's senior market accident & health insurance
products are reinsured under coinsurance treaties with unaffiliated insurers,
while the life insurance risks are reinsured under either coinsurance or
yearly-renewable term treaties with unaffiliated insurers. Under coinsurance
treaties, the reinsurer receives an agreed upon percentage of all premiums and
reimburses the Company that same percentage of any losses. In addition, the
Company receives certain allowances from the reinsurers to cover commissions,
expenses and premium taxes. Under yearly-renewable term treaties, the reinsuring
company receives premiums at an agreed upon rate and holds the required reserves
for its share of the risk on a yearly-renewable term basis. The Company is also
party to certain reinsurance agreements whereby the Company limits its loss in
excess of certain thresholds. The Company evaluates the financial condition of
its reinsurers and monitors concentrations of credit risk to
F-27
74
minimize its exposure to significant losses from reinsurer insolvencies. A
contingent liability exists with respect to reinsurance that may become a
liability of the Company in the event that the reinsurers should be unable to
meet the obligations that they assumed.
The Company has several quota share reinsurance agreements in place
with Hanover Life Reassurance Company ("HLR"), Cologne Life Reinsurance Company
("CLR") and Transamerica Occidental Life ("TA"), (collectively, the
"Reinsurers"), which Reinsurers are rated A or better by A.M. Best. These
agreements cover various accident & health insurance products written or
acquired by the Company and contain ceding percentages ranging between 50% and
100%. The Reinsurers receive their pro-rata premium and pay their pro-rated
benefits. In addition, the Company receives allowances from the Reinsurers to
reimburse the commission, administration and premium tax expenses associated
with the business reinsured. At December 31, 2000 and 1999 amounts due from
these Reinsurers were as follows:
2000 1999
---- ----
Reinsurer (In thousands)
---------
CLR $ 89,469 $ 87,886
HLR 54,838 44,269
TA 21,191 23,064
-------- --------
Total $165,498 $155,219
-------- --------
In conjunction with the 1999 Acquisition, Peninsular entered into a
coinsurance agreement with Occidental Life Insurance Company of North Carolina
("Occidental"), a former affiliate, to cede 100% of its direct business
(primarily life and annuity business). Currently, Occidental is rated B+ by A.M.
Best. It is the intent of the parties to this agreement to replace the
coinsurance agreement with a full assumption agreement which will effectively
transfer the business to Occidental. As of December 31, 2000, approximately 52%
of the business had been transferred. The reinsurance recoverable from
Occidental totaled $8.8 million and $19.2 million at December 31, 2000 and 1999,
respectively.
A summary of reinsurance activity for the three years ended December
31, 2000 is presented below:
As of December 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
Life insurance in force
Gross amount $3,651,778 $4,445,889 $2,038,438
Ceded to other companies (916,669) (1,571,284) (735,791)
Assumed from other companies 51,175 50,699 47,084
---------- ---------- ----------
Net Amount $2,786,284 $2,925,304 $1,349,731
========== ========== ==========
Percentage of assumed to net 2% 2% 4%
========== ========== ==========
Year Ended December 31,
--------------------------------------------
Premiums 2000 1999 1998
---- ---- ----
(In thousands)
Life insurance $ 41,371 $ 25,704 $ 15,242
Accident & health 409,952 226,849 115,802
-------- -------- -------
Total gross premiums 451,323 252,553 131,044
-------- -------- -------
Ceded to other companies
Life insurance (10,210) (9,290) (7,238)
Accident & health (224,415) (129,537) (82,308)
-------- -------- -------
Total ceded premiums (234,625) (138,827) (89,546)
-------- -------- -------
Assumed from other companies
Life insurance 2,538 1,177 998
Accident & health 517 574 -
-------- -------- -------
Total assumed premium 3,055 1,751 998
-------- -------- -------
Net amount
Life insurance 33,699 17,591 9,002
Accident & health 186,054 97,886 33,494
-------- -------- -------
Total net premium $219,753 $115,477 $42,496
======== ======== =======
Percentage of assumed to net
Life insurance 8% 7% 11%
======== ======== =======
Accident & health 0% 1% 0%
======== ======== =======
Total assumed to total net 1% 2% 2%
======== ======== =======
F-28
75
Total claims recovered for 2000 and 1999 totaled $175.7 million and
$104.9 million, respectively.
12. LOAN AGREEMENTS:
As of December 31, 2000 and 1999, in connection with the 1999
Acquisition on July 30, 1999, (see Note 3) the Company had an $80 million credit
facility consisting of a $70 million term loan and a $10 million revolving loan
facility. The term loan calls for interest at the London Interbank Offering Rate
for one, two, three or six months ("LIBOR") plus 350 basis points (currently
9.0425%) with principal repayment over a seven-year period and a final maturity
date of July 31, 2006. The term loan is secured by a first priority interest in
100% of the outstanding common stock of American Exchange, American Progressive,
PFI, Inc. (an immaterial subsidiary), Quincy (an immaterial subsidiary),
WorldNet and 65% of the outstanding common stock of UAFC (Canada) Inc. (the 100%
parent of PennCorp Canada). In addition, the Company incurred loan origination
fees of $3.5 million, which were capitalized and will be amortized on a
straight-line basis over the life of the loan. For the year ended December 31,
2000, the Company paid $7.1 million in interest and fees in connection with the
credit facility. The Company paid $1.5 million in principal on July 31, 2000 and
$1.9 million in principal on October 31, 2000 and January 31, 2001.
The following table shows the schedule of remaining principal payments
on the Company's outstanding term loan, with the final payment in July 2006:
Principal
Repayment
---------
(In thousands)
2001 $ 8,175
2002 10,700
2003 11,525
2004 12,400
2005 13,275
2006 10,575
-------
Total $66,650
-------
In August 2000, to fund the CHCS acquisition (see Note 4), the Company
drew down $3.0 million of the revolving loan facility, which amount currently
incurs interest at 9.06% and is due to mature on July 31, 2004. The Company pays
a commitment fee of 50 basis points on the unutilized facility, which is
currently $7.0 million.
The following table sets forth certain summary information with respect
to total borrowings of the Company for the three years ended December 31, 2000:
As of December 31, Year Ended December 31,
------------------------- -----------------------------------------------
Weighted
Maximum Average(a) Average
Amount Interest Amount Amount Interest
Outstanding Rate Outstanding Outstanding Rate (b)
----------- ---- ----------- ----------- --------
(In thousands) (In thousands) (In thousands)
2000 $69,650 10.22% $71,500 $70,056 10.05%
======= ==== ======= ======= ====
1999 $70,000 9.01% $70,000 $31,833 8.98%
======= ==== ======= ======= ====
1998 $ 4,750 7.97% $ 5,000 $ 3,743 8.19%
======= ==== ======= ======= ====
F-29
76
- ------------------------
(a) The average amounts of borrowings outstanding were computed by
determining the arithmetic average of the months' average
outstanding in borrowings.
(b) The weighted-average interest rates were determined by dividing
interest expense related to total borrowings by the average amounts
outstanding of such borrowings.
13. COMMITMENTS:
The Company is obligated under certain lease arrangements for its
executive and administrative offices in New York, Florida, Texas, North
Carolina, and Ontario, Canada. Rent expense for the three years ended December
31, 2000, 1999, and 1998 was $2.9 million, and $1.5 million, and $0.7 million,
respectively. The minimum rental commitments, subject to escalation clauses, at
December 31, 2000 under non-cancelable operating leases are as follows:
(In thousands)
2001 $1,795
2002 1,730
2003 1,372
2004 843
2005 and thereafter 1,830
------
Totals $7,570
======
14. UNIVERSAL AMERICAN FINANCIAL CORP. 401(K) SAVINGS PLAN:
Effective April 1, 1992, the Company adopted the Universal American
Financial Corp. 401(k) Savings Plan ("Savings Plan"). The Savings Plan is a
voluntary contributory plan under which employees may elect to defer
compensation for federal income tax purposes under Section 401(k) of the
Internal Revenue Code of 1986. The employee is entitled to participate in the
Savings Plan by contributing through payroll deductions up to 20% of the
employee's compensation. Currently, the Company matches the employee's
contribution up to 2% of the employee's compensation with Company common stock.
As of December 31, 2000, the Savings Plan held 426,000 shares of the Company's
common stock.
The participating employee is not taxed on these contributions until
they are distributed. Moreover, the employer's contributions vest at the rate of
25% per plan year. Amounts credited to employee's accounts under the Savings
Plan are invested by the employer-appointed investment committee. Generally, a
participating employee is entitled to distributions from the Savings Plan upon
termination of employment, retirement, death or disability. Savings Plan
participants who qualify for distributions may receive a single lump sum, have
the assets transferred to another qualified plan or individual retirement
account, or receive a series of specified installment payments. Total matching
contributions by the Company under the Savings Plan were $262,000, $172,000 and
$92,000 in 2000, 1999 and 1998, respectively.
15. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
a. Fixed maturities available for sale: For those securities
available for sale, fair value equals quoted market price, if
available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar
securities.
b. Equity securities: For equity securities carried at fair
value, fair value equals quoted market price.
F-30
77
c. Cash and cash equivalents: For cash and cash equivalents, the
carrying amount is a reasonable estimate of fair value.
d. Investment contract liabilities: For annuity and Universal
American life type contracts, the carrying amount is the
policyholder account value (see Note 2e); estimated fair value
equals the policyholder account value less surrender charges.
e. Short term debt and loan payable: For short-term borrowings
and loan payable, the carrying value is a reasonable estimate
of fair value due to their short-term nature.
f. Accounts receivable and uncollected premiums: Accounts
receivable and uncollected premiums are primarily insurance
contract related receivables, which are determined based upon
the underlying insurance liabilities and added reinsurance
amounts.
The estimated fair values of the Company's financial instruments as of
December 31, 2000 and 1999 are as follows:
2000
-------------------------------
Carrying
Amount Fair Value
------ ----------
(In thousands)
Financial assets:
Fixed maturities available for sale $751,738 $751,738
Equity securities 3,547 3,547
Policy loans (a) 25,077
Other invested assets (b) 2,037
Mortgage loans (b) 2,281
Cash and cash equivalents 40,250 40,250
Financial liabilities:
Investment contract liabilities 223,681 207,697
Loan payable 69,650 69,650
1999
-------------------------------
Carrying
Amount Fair Value
------ ----------
(In thousands)
Financial assets:
Fixed maturities available for sale $717,560 $717,560
Equity securities 4,838 4,838
Policy loans (a) 25,640
Other invested assets (b) 2,763
Mortgage loans (b) 2,743
Cash and cash equivalents 58,753 58,753
Financial liabilities:
Investment contract liabilities 238,665 215,867
Loan payable 70,000 70,000
- ----------------------------
(a) It is not practicable to estimate the fair value of policy
loans, as they have no stated maturity and their rates are set
at a fixed spread to related policy liability rates. Policy
loans are carried at the aggregate unpaid principal balances
in the consolidated balance sheets, and earn interest at rates
between 6% to 8%. Individual policy liabilities, in all cases,
equal or exceed outstanding policy loan balances.
(b) Mortgage loans are carried at the aggregate unpaid balances
and the fair market value was not determined as the amount
involved was considered to be immaterial. Other invested
assets consists mainly of collateralized loans which are
carried at cost. The determination of fair value for these
invested assets is not practical because there is no active
trading market for such invested assets.
16. CONDENSED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The quarterly results of operations for the three years ended December
31, 2000 are presented below. Due to the use of weighted average shares
outstanding when determining the denominator for earnings per share, the sum of
the quarterly per common share amounts may not equal the per common share
amounts for the twelve months ended December 31, 2000.
F-31
78
2000 Three Months Ended
- -------------------------------------------- ----------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(In thousands)
Total revenue $70,770 $71,826 $71,469 $70,026
Total benefits, claims & other expenses 61,956 62,990 63,203 62,876
------- ------- ------- -------
Operating income (loss) before income taxes 8,814 8,836 8,266 7,150
Federal income tax expense 3,155 3,207 2,853 966
------- ------- ------- -------
Net income applicable to common
Shareholders $ 5,659 $ 5,629 $ 5,413 $ 6,184
======= ======= ======= =======
Basic earnings per share $ 0.12 $ 0.12 $ 0.12 $ 0.13
======= ======= ======= =======
Diluted earnings per share $ 0.12 $ 0.12 $ 0.12 $ 0.13
======= ======= ======= =======
1999 Three Months Ended
- -------------------------------------------- ------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(In thousands)
Total revenue $13,850 $14,713 $50,188 $69,385
Total benefits, claims & other expenses 12,783 13,640 45,002 60,655
------- ------- ------- -------
Operating income (loss) before income taxes 1,067 1,073 5,186 8,730
Federal income tax expense 356 371 1,953 3,563
------- ------- ------- -------
Net Income 711 702 3,233 5,167
Redemption accrual on Series C
Preferred Stock 180 -- -- --
------- ------- ------- -------
Net income applicable to common
Shareholders $ 531 $ 702 $ 3,233 $ 5,167
======= ======= ======= =======
Basic earnings per share $ 0.07 $ 0.07 $ 0.10 $ 0.12
======= ======= ======= =======
Diluted earnings per share $ 0.05 $ 0.05 $ 0.09 $ 0.11
======= ======= ======= =======
1998 Three Months Ended
- ------------------------------------------- -----------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(In thousands)
Total revenue $13,815 $14,331 $14,068 $13,875
Total benefits, claims & other expenses 13,040 13,071 13,050 12,996
------- ------- ------- -------
Operating income (loss) before income taxes 775 1,260 1,018 879
Federal income tax expense 242 450 346 286
------- ------- ------- -------
Net Income 533 810 672 593
Redemption accrual on Series C
Preferred Stock 108 109 108 109
------- ------- ------- -------
Net income applicable to common
Shareholders $ 425 $ 701 $ 564 $ 484
======= ======= ======= =======
Basic earnings per share $ 0.06 $ 0.09 $ 0.07 $ 0.07
======= ======= ======= =======
Diluted earnings per share $ 0.04 $ 0.06 $ 0.05 $ 0.05
======= ======= ======= =======
17. BUSINESS SEGMENT INFORMATION:
Currently, the Company manages its business, with primary emphasis on
its distribution channels, through four operating segments, Senior Market
Brokerage, Career Agency, Special Markets and Administrative Services and also
maintains a Corporate segment.
SENIOR MARKET BROKERAGE - This distribution channel consists of a general agency
system and insurance brokerage system that focus on the sale of products in the
senior market segment, including Medicare Supplement, Long-Term Care, Final
Expense Life Insurance and Annuities.
CAREER AGENCY SYSTEM - The Career Agency Segment was acquired in the 1999
Acquisition in July 1999 and comprises the operations of Pennsylvania Life and
PennCorp Life of Canada. PennCorp Life of Canada operates exclusively in Canada,
while Pennsylvania Life operates in both the U.S. ("Pennsylvania
F-32
79
Life U.S.") and Canada. The Career Agency segment is comprised of a career
agency field force, which distributes fixed benefit accident and sickness, life
insurance and supplemental senior health insurance in the United States and
Canada. The Career Agents are under exclusive contract with Pennsylvania Life
and PennCorp Life of Canada.
SPECIAL MARKETS - Through its own operating history and through prior
acquisitions, Universal American has accumulated various lines of business that
it manages in its Special Markets segments. These products include traditional,
interest-sensitive and group life insurance, individual medical and other
accident and health insurance.
ADMINISTRATIVE SERVICES - In connection with the acquisition of AIAG and CHCS,
Universal American has increased its efforts on the development of the
Administrative Services segment. The primary services are to act as a third
party administrator and service provider on various senior supplemental health
insurance products offered by both affiliated and unaffiliated insurance
companies. Services performed include policy underwriting, telephone
verification, policyholder services, claims adjudication, clinical case
management, care assessment and referral to health care facilities.
CORPORATE & ELIMINATIONS - This segment includes the corporate
activities of the holding company, including interest on debt. This segment also
includes the elimination of intersegment revenues and expenses that are reported
gross in each of the operating segments. These eliminations affect the amounts
reported on the individual financial statement line items, but do not change
operating income before taxes. The significant items eliminated include
intersegment revenue and expense relating to services performed by the
Administrative Services segment for the Career Agency, Senior Market Brokerage
and Special Market segments and interest on notes issued by the Corporate
segment to the other operating segments.
Financial data by segment for the three years ended December 31, 2000
is as follows:
December 31, 2000
(In thousands)
Senior Parent
Career Market Special Administrative Company &
Agents Brokerage Markets Services Eliminations Total
------ --------- ------- -------------- ------------ -----
Net premiums and policyholder
fees earned -
Life and Annuity $ 17,258 $ 3,669 $ 12,773 $ -- $ -- $ 33,700
Net premiums and policyholder
fees earned - Health 112,100 48,451 25,502 -- -- 186,053
-------- -------- -------- ------- -------- ----------
Net premiums 129,358 52,120 38,275 -- -- 219,753
Net investment income 31,714 11,391 14,704 77 (941) 56,945
Realized gains (losses) 147 201 (202) -- -- 146
Fee and other income 647 3 332 24,130 (17,865) 7,247
-------- -------- -------- ------- -------- ----------
Total revenues 161,866 63,715 53,109 24,207 (18,806) 284,091
-------- -------- -------- ------- -------- ----------
Policyholder benefits 81,432 40,656 31,831 -- -- 153,919
Interest credited to policyholders 1,657 4,996 3,477 -- -- 10,130
Change in deferred acquisition costs (12,476) (5,015) 1,566 -- -- (15,925)
Amortization of present value of
future profits and goodwill (584) 183 230 2,920 -- 2,749
Commissions and general expenses 62,264 17,203 11,417 17,443 (8,175) 100,152
-------- -------- -------- ------- -------- ----------
Total benefits, claims and other
deductions 132,293 58,023 48,521 20,363 (8,175) 251,025
-------- -------- -------- ------- -------- ----------
Operating income before taxes $ 29,573 $ 5,692 $ 4,588 $ 3,844 $(10,631) $ 33,066
======== ======== ======== ======= ======== ==========
ASSETS
Deferred policy acquisition costs $ 15,335 $ 25,507 $ 7,738 $ -- $ 71 $ 48,651
Goodwill (1,944) 4,047 -- 2,665 1,944 6,712
Present value of future profits -- 324 644 4,835 -- 5,802
Other assets 536,332 328,913 270,317 13,856 (20,917) 1,128,699
-------- -------- -------- ------- -------- ----------
Total assets $549,723 $358,791 $278,699 $21,356 $(18,704) $1,189,864
======== ======== ======== ======= ======== ==========
F-33
80
December 31, 1999
(In thousands)
Senior Parent
Career Market Special Administrative Company &
Agents Brokerage Markets Services Eliminations Total
------ --------- ------- ------- ------------ -----
Net premiums and policyholder
fees earned - Life and Annuity $ 7,198 $ 1,068 $ 9,325 $ -- $ -- $ 17,591
Net premiums and policyholder
fees earned - Health 48,365 31,574 17,947 -- -- 97,886
-------- -------- -------- ------ ------- ----------
Net premiums 55,563 32,642 27,272 -- -- 115,477
Net investment income 12,133 9,422 8,662 -- (904) 29,313
Realized gains 81 (81) (241) -- -- (241)
Fee and other income 228 41 246 9,290 (6,218) 3,587
-------- -------- -------- ------ ------- ----------
Total revenues 68,005 42,024 35,939 9,290 (7,122) 148,136
-------- -------- -------- ------ ------- ----------
Policyholder benefits 30,396 23,643 19,216 -- -- 73,255
Interest credited to policyholders 437 5,550 2,681 -- -- 8,668
Change in deferred acquisition costs (2,919) (3,722) 412 -- -- (6,229)
Amortization of present value
of future profits and goodwill (427) 183 314 -- -- 70
Commissions and general expenses 28,239 12,580 8,939 7,254 (696) 56,316
-------- -------- -------- ------ ------- ----------
Total benefits, claims and other deductions 55,726 38,234 31,562 7,254 (696) 132,080
-------- -------- -------- ------ ------- ----------
Operating income before taxes $ 12,279 $ 3,790 $ 4,377 $2,036 $(6,426) $ 16,056
======== ======== ======== ====== ======= ==========
ASSETS
Deferred policy acquisition costs $ 2,944 $ 21,879 $ 10,120 $ -- $ -- $ 34,943
Goodwill -- 4,201 -- -- -- 4,201
Present value of future profits -- 370 856 -- -- 1,226
Other assets 508,785 314,212 287,073 6,122 (3,141) 1,113,051
-------- -------- -------- ------ ------- ----------
Total assets $511,729 $340,662 $298,049 $6,122 $(3,141) $1,153,421
======== ======== ======== ====== ======= ==========
December 31, 1998 (restated)
(In thousands)
Senior Parent
Career Market Special Administrative Company &
Agents Brokerage Markets Services Eliminations Total
------ --------- ------- ------- ------------ -----
Net premiums and policyholder
fees earned - Life and Annuity $ -- $ 1,738 $ 6,485 $ -- $ -- $ 8,223
------ -------- ------- ------ -------- --------
Net premiums and policyholder
fees earned - Health -- 20,069 14,204 -- -- 34,273
Net premiums -- 21,807 20,689 -- -- 42,496
Net investment income -- 8,166 3,125 -- (570) 10,721
Realized gains -- 2,580 (2,324) -- -- 256
Fee and other income -- -- 238 8,700 (6,322) 2,616
------ -------- ------- ------ -------- --------
Total revenues -- 32,553 21,728 8,700 (6,892) 56,089
------ -------- ------- ------ -------- --------
Policyholder benefits -- 16,589 14,405 -- -- 30,994
Interest credited to policyholders -- 5,458 1,782 -- -- 7,240
Change in deferred acquisition costs -- (3,783) 253 -- -- (3,530)
Amortization of present value of
future profits and goodwill -- 200 145 -- -- 345
Commissions and general expenses -- 9,425 6,352 6,720 (5,389) 17,108
------ -------- ------- ------ -------- --------
Total benefits, claims and other deductions -- 27,889 22,937 6,720 (5,389) 52,157
------ -------- ------- ------ -------- --------
Operating income before taxes $ -- $ 4,664 $(1,209) $1,980 $ (1,503) $ 3,932
====== ======== ======= ====== ======== ========
ASSETS
Deferred policy acquisition costs $ -- $ 15,109 $ 9,174 $ -- $ -- $ 24,283
Goodwill -- 4,354 -- -- -- 4,354
Present value of future profits -- 415 1,154 -- -- 1,569
Other assets -- 181,340 78,249 4,644 (11,137) 253,096
------ -------- ------- ------ -------- --------
Total assets $ -- $201,218 $88,577 $4,644 $(11,137) $283,302
====== ======== ======= ====== ======== ========
F-34
81
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNIVERSAL AMERICAN FINANCIAL CORP.
(PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
---- ----
ASSETS (In thousands)
Cash and cash equivalents $ 3,212 $ 6,413
Investments in subsidiaries at equity 194,262 142,877
Note receivable from affiliate 70,000 70,000
Interest receivable on surplus note -- 2,721
Due from subsidiary 209 422
Capitalized loan origination fees 2,958 3,516
Deferred tax asset 875 58
Other assets 462 1,467
-------- --------
Total assets $271,978 $227,474
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loan Payable $ 69,650 $ 70,000
Note Payable to American Progressive 7,900 7,900
Due to subsidiary 9,889 4,185
Amounts payable and other liabilities 10,590 11,424
-------- --------
Total liabilities 98,029 93,509
-------- --------
Total stockholders' equity 173,949 133,965
-------- --------
Total liabilities and stockholders' equity $271,978 $227,474
======== ========
See notes to condensed financial statements.
F-35
82
Schedule II - continued
UNIVERSAL AMERICAN FINANCIAL CORP.
(PARENT COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
2000 1999 1998
---- ---- ----
(In thousands)
REVENUES:
Net investment income $ 7,258 $ 2,762 $ 98
Other income 107 10 38
-------- -------- -------
Total revenues 7,365 2,772 136
-------- -------- -------
EXPENSES:
Selling, general and administrative expenses 3,833 3,620 1,355
Interest expense 7,097 2,859 307
-------- -------- -------
Total expenses 10,930 6,479 1,662
-------- -------- -------
Operating loss before provision for federal
Income taxes and equity income (3,565) (3,707) (1,526)
Federal income tax expense (benefit) 5,381 1,250 (345)
-------- -------- -------
Net income (loss) before equity income of subsidiaries (8,946) (4,957) (1,181)
Equity in undistributed income 31,831 14,770 3,789
-------- -------- -------
Net income 22,885 9,813 2,608
Redemption accrual on Series C Preferred Stock -- 180 434
-------- -------- -------
Net income applicable to common shareholders $ 22,885 $ 9,633 $ 2,174
======== ======== =======
See notes to condensed financial statements.
F-36
83
Schedule II - continued
UNIVERSAL AMERICAN FINANCIAL CORP.
(PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
2000 1999 1998
---- ---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 22,885 $ 9,813 $ 2,608
Adjustments to reconcile net income to
net cash used by operating activities:
Stock based compensation 830 -- --
Equity earnings of subsidiaries (31,831) (91,818) (5,805)
Change in surplus note interest receivable 2,721 (2,721) --
Change in amounts due to/from subsidiaries 5,917 268 2,914
Change in loan origination fees 558 (3,515) --
Change in deferred income taxes (817) 1,269 --
Change in other assets and liabilities 1,226 1,113 (838)
-------- -------- -------
Net cash (used by) provided from operating activities 1,489 (85,591) (1,121)
-------- -------- -------
Cash flows from investing activities:
Issuance of surplus note receivable to American Exchange -- (70,000) --
Redemption of surplus note due from American Pioneer -- 1,000 --
Capital contribution to American Pioneer -- (1,000) --
Capital contribution to PennCorp Life of Canada (1,400) -- --
Purchase of business (6,189) -- (3,950)
-------- -------- -------
Net cash used by investing activities (7,589) (70,000) (3,950)
-------- -------- -------
Cash flows from financing activities:
Net proceeds from issuance of common stock 213 93,209 421
Purchase of Treasury Stock (373) -- --
Proceeds from the issuance of Series C Preferred Stock -- -- --
Proceeds from the issuance of Series D Preferred Stock -- 1,750 2,250
Increase in note payable to American Progressive -- -- 1,975
Increase in loan payable 3,000 70,000 1,250
Principal repayment on debt (3,350) (4,750) --
Dividends received 3,409 -- --
-------- -------- -------
Net cash provided from financing activities 2,899 160,209 5,896
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (3,201) 4,618 825
Cash and cash equivalents:
At beginning of year 6,413 1,795 970
-------- -------- -------
At end of year $ 3,212 $ 6,413 $ 1,795
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 8,421 $ 2,859 $ 307
======== ======== =======
Income taxes $ 39 $ 18 $ --
======== ======== =======
See notes to condensed financial statements
F-37
84
UNIVERSAL AMERICAN FINANCIAL CORP.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In the parent-company-only financial statements, the Company's
investment in subsidiaries is stated at cost plus equity in undistributed
earnings of subsidiaries since date of acquisition. The Company's share of net
income of its unconsolidated subsidiaries is included in consolidated income
using the equity method. Parent-company-only financial statements should be read
in conjunction with the Company's consolidated financial statements.
F-38
85
Schedule III - Supplementary Insurance Information
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
2000 1999 1998
---- ---- ----
(In thousands)
Deferred policy acquisition costs $ 48,651 $ 34,943 $ 24,283
======== ======== ========
Policyholder account balances $223,681 $238,665 $154,886
======== ======== ========
Policy and contract claims $ 85,091 $ 77,905 $ 26,630
======== ======== ========
Premiums and policyholders fees earned $219,753 $115,477 $ 42,496
======== ======== ========
Net investment income $ 56,945 $ 29,313 $ 10,721
======== ======== ========
Interest credited to policyholders $ 10,130 $ 8,668 $ 7,240
======== ======== ========
Claims and other benefits and change in future policy benefits
$153,919 $ 73,255 $ 30,994
======== ======== ========
Increase in deferred acquisition costs $ 15,925 $ 6,229 $ 3,530
======== ======== ========
Commissions and other operating costs and expenses $100,152 $ 56,316 $ 17,108
======== ======== ========
F-39