UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Period Ended September 30, 1996
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. No.)
Mt. Ebo Corporate Park, Brewster, NY 10509
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 278-4094
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 and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
The number of shares outstanding of each of the Registrant's Common Stock
and Common Stock Warrants as of November 1, 1996 were 7,043,221 and 671,481,
respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Operations for the nine
months ended September 30, 1996 and September 30,
1995 4
Consolidated Statements of Operations for the three
months ended September 30, 1996 and September 30,
1995 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and September 30,
1995 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
PART II - OTHER INFORMATION 14
Signature 14
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
(unaudited)
------------- ------------
<S> <C> <C>
ASSETS:
Investments:
Cash and cash equivalents, at cost which
approximates market ......................... $ 12,564,739 $ 12,289,801
Fixed maturities (Notes 5 and 6):
Available for sale, at fair value (amortized
cost $122,946,062 and $114,112,556) ........ 120,516,504 116,428,921
Equity securities, at fair value (cost $46,133) 18,353 15,297
Policy loans .................................. 6,163,038 5,622,136
Property tax liens ............................ 131,729 178,908
Mortgage loans ................................ 883,884 1,067,605
------------- ------------
Total investments ................................ 140,278,247 135,602,668
Accrued investment income ........................ 3,131,484 2,412,576
Amounts due from reinsurers ...................... 25,025,702 17,635,580
Due and unpaid premiums .......................... 2,355,120 2,826,833
Deferred policy acquisition costs ................ 18,782,328 16,564,420
Deferred income tax asset ........................ 1,875,348 1,328,314
Other assets ..................................... 7,882,791 6,623,996
------------- ------------
Total assets ................................ $ 199,331,020 $182,994,387
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Policyholder account balances .................... $ 133,233,886 $118,608,836
Reserves for future policy benefits .............. 24,140,441 22,099,350
Policy and contract claims-life .................. 847,718 693,679
Policy and contract claims-health ................ 7,765,960 8,681,136
Short-term debt .................................. 800,000 800,000
Notes payable .................................... -- 369,698
Amounts due to reinsurers ........................ 7,524,510 1,294,295
Deferred revenue ................................. 428,038 638,293
Other liabilities ................................ 3,475,063 5,694,824
------------- ------------
Total liabilities ........................... 178,215,616 158,880,111
------------- ------------
STOCKHOLDERS' EQUITY (Notes 7 and 8):
Series B preferred stock ........................ 4,000,000 4,000,000
Common stock (authorized 20,000,000,
issued and outstanding 7,006,221 and 6,957,532) . 70,062 69,575
Common stock warrants (authorized, issued and
outstanding 671,481 and 679,621) ............ -- --
Additional paid-in capital ...................... 15,918,904 15,849,542
Retained earnings ............................... 3,331,784 2,825,508
Net unrealized investment gains (losses) ........ (2,205,346) 1,369,651
------------- ------------
Total stockholders' equity .................. 21,115,404 24,114,276
------------- ------------
Total liabilities and stockholders' equity ....... $ 199,331,020 $182,994,387
============= ============
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine months ended September 30,
1996 1995
------------ ------------
REVENUES:
Premiums and policyholder fees earned ......... $ 28,231,838 $ 28,145,711
Net investment income ......................... 2,233,461 2,116,364
Realized gains on investments ................. 173,133 616,721
Fee income .................................... 2,270,608 2,580,266
Amortization of deferred revenue .............. 210,254 163,377
------------ ------------
Total revenue ............................. 33,119,294 33,622,439
------------ ------------
BENEFITS, CLAIMS & OTHER DEDUCTIONS:
Increase (decrease) in future policy benefits . 1,077,154 (1,284,357)
Claims and other benefits ..................... 16,678,786 17,530,820
Increase in deferred acquisition costs ........ (1,755,621) (2,642,376)
Amortization of present value of future profits -- 153,423
Other operating costs and expenses ............ 16,454,156 17,729,208
------------ ------------
Total benefits, claims & other deductions . 32,454,475 31,486,718
------------ ------------
Operating income before income taxes ........... 664,819 2,135,721
Provision for income taxes ..................... 158,543 726,145
------------ ------------
Net income ..................................... 506,276 1,409,576
============ ============
Earnings per common equivalent shares (Note 3): $ 0.05 $ 0.13
============ ============
See notes to unaudited consolidated financial statements
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30,
1996 1995
------------ ------------
REVENUES:
Premiums and policyholder fees earned ......... $ 10,871,542 $ 10,160,825
Net investment income ......................... 630,930 463,841
Realized gains (losses) on investments ........ 78,196 214,384
Fee income ..................................... 638,528 709,835
Amortization of deferred revenue .............. 70,084 80,825
------------ ------------
Total revenue ............................. 12,289,280 11,629,710
------------ ------------
BENEFITS, CLAIMS & OTHER DEDUCTIONS:
Increase in future policy benefits ............ 1,034,933 744,698
Claims and other benefits ..................... 5,780,883 5,478,678
Increase in deferred acquisition costs ........ (429,570) (1,029,378)
Amortization of present value of future profits -- 51,141
Other operating costs and expenses ............ 5,752,769 5,899,062
------------ ------------
Total benefits, claims & other deductions . 12,139,015 11,144,201
------------ ------------
Operating income before income taxes ........... 150,265 485,509
Provision for income taxes ..................... 49,011 165,073
------------ ------------
Net income ..................................... 101,254 320,436
============ ============
Earnings per common equivalent shares (Note 3): $ 0.01 $ 0.03
============ ============
See notes to unaudited consolidated financial statements
5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 506,276 $ 1,409,576
Adjustments to reconcile net income to net
cash provided by operating activities:
Change in reserves for future policy benefits ... 2,041,091 (959,656)
Change in policy and contract claims ............ (761,137) (860,617)
Change in deferred acquisition costs ............ (1,755,621) (2,642,376)
Amortization of present value of future profits . -- 153,423
Change of deferred revenue ...................... (210,255) (163,377)
Change in policy loans .......................... (540,902) (389,095)
Change in accrued investment income ............. (718,908) (308,945)
Change in reinsurance balances .................. (1,159,907) (1,232,552)
Realized gains on investments ................... (173,133) (616,721)
Change in other assets & liabilities ............ (2,739,114) (807,008)
------------ ------------
Net cash used by operating expenses ................ (5,511,610) (6,417,348)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed maturities-
available for sale ............................ 28,789,369 31,480,237
Proceeds from sale of fixed maturities-
held to maturity .............................. -- 928,180
Proceeds from redemption of fixed maturities-
available for sale ............................ 8,073,216 6,546,371
Proceeds from redemption of fixed maturities-
held to maturity .............................. -- 1,934,886
Cost of fixed maturities purchased-
available for sale ............................ (45,637,138) (44,498,774)
Cost of fixed maturities purchased-held
to maturity ................................... -- (795,741)
Proceeds from sale of equity securities ......... 506,250 --
Cost of equity securities purchased ............. (501,250) --
Change in other invested assets ................. 230,900 (12,071)
------------ ------------
Net cash used by investing activities .............. (8,538,653) (4,416,912)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock .......... 69,849 1,214,036
Increase in policyholder account balances ....... 14,625,050 5,231,317
Change in notes payable ......................... (369,698) (1,618,062)
------------ ------------
Net cash provided from financing activities ........ 14,325,201 4,827,291
------------ ------------
Net increase (decrease) in cash and cash equivalents 274,938 (6,006,969)
Cash and cash equivalents at beginning of period ... 12,289,801 16,420,763
------------ ------------
Cash and cash equivalents at end of period ......... $ 12,564,739 $ 10,413,794
============ ============
Supplemental cash flow information:
Cash paid during the year for interest ............. $ 63,125 $ 74,525
============ ============
Cash paid during the year for income taxes ......... $ -- $ --
============ ============
Supplemental disclosure of non-cash
investing activities:
Implementation of Statement 115
Transfer of securities available for
sale to held to maturity ...................... $ -- $ --
============ ============
Transfer of securities held to maturity to
available for sale ............................ $ -- $ --
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and consolidate the accounts of
Universal American Financial Corp. ("Universal), and its subsidiaries
(collectively the "Company"), American Progressive Life & Health Insurance
Company of New York ("American Progressive"), American Pioneer Life Insurance
Company ("American Pioneer"), Quincy Coverage Corp. ("Quincy") and WorldNet
Services Corp. ("WorldNet").
Effective July 2, 1996, the Company changed its name from Universal
Holding Corp. to Universal American Financial Corp. The Company's common stock
and common stock warrants continue to trade under the symbols UHCO and UHCOW,
respectively, on the Nasdaq Stock Market.
The interim financial information herein is unaudited, but in the opinion
of management, includes all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods. The results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year. The consolidated financial statements should be read in
conjunction with the Form 10-K for the year ended December 31, 1995.
Certain reclassifications have been made to the prior year's financial
statements to conform with current period classifications.
2. Federal Income Taxes
The Company and its non life subsidiaries file a consolidated Federal
income tax return. The life insurance subsidiaries file a separate consolidated
Federal income tax return.
3. Earnings Per Share
Earnings per common equivalent share was computed by dividing the net
income applicable to common shareholders by the weighted average number of
common equivalent shares outstanding during each period.
4. Note Payable to Ontario Blue Cross
On April 1, 1994 WorldNet purchased certain assets of Health Assistance
for Travelers, Inc.("HAT") and an affiliated corporation for Can. $625,000
(approximately U.S. $470,000), payable over five years. WorldNet also executed
an agreement with HAT and Ontario Blue Cross ("OBC") under which WorldNet
subcontracted HAT's obligations under certain service contracts between HAT and
OBC, and between HAT and other insurers. The note payable to HAT required annual
payments of Can. $125,000 (approximately U.S. $94,000) plus accrued interest,
beginning on April 1, 1994, and bore interest at 6%. In 1995, substantially all
of the assets of OBC (including the shares of OBC's subsidiary HAT) were
acquired by Liberty Mutual Insurance Company ("Liberty Health"). In February,
1996, WorldNet and Liberty Health agreed to terminate the service agreement
between OBC and WorldNet. In connection with the termination of the service
agreement, Liberty Health agreed to cancel the promissory notes executed on
April 1, 1994, which notes amounted to $370,000 at December 31, 1995. At the
same time, the Company wrote off certain corresponding assets, including the
value of the service agreement, which assets amounted to approximately $145,000.
The resulting net income from this transaction was approximately $225,000.
7
<PAGE>
5. Investments
As of September 30, 1996 and December 31, 1995, fixed maturity securities
are classified as available for sale and are carried at fair value, with the
unrealized gain or loss, net of tax and other adjustments (deferred policy
acquisition costs), included in stockholders' equity.
The amortized cost and fair value of fixed maturities as of September 30,
1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government $ 12,773,655 $ 53,289 $ (170,291) $ 12,656,653
Foreign government debt securities 1,490,505 -- (37,705) 1,452,800
Corporate debt securities 72,806,810 754,989 (1,781,347) 71,780,452
Mortgage-backed securities 35,875,092 452,580 (1,701,073) 34,626,599
------------- ------------- ------------- -------------
$ 122,946,062 $ 1,260,858 $ (3,690,416) $ 120,516,504
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and obligations of
US government $ 19,546,697 $ 393,356 $ (150,445) $ 19,789,608
Corporate debt securities 72,149,554 2,669,249 (294,300) 74,524,503
Mortgage-backed securities 22,416,305 373,429 (674,924) 22,114,810
------------- ------------- ------------- -------------
$ 114,112,556 $ 3,436,034 $ (1,119,669) $ 116,428,921
============= ============= ============= =============
</TABLE>
The amortized cost and fair value of fixed maturities at September 30,
1996 by contractual maturity, are shown below. Expected maturities may 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
------------ ------------
Due in 1 year or less $ 4,560,352 $ 4,572,649
Due after 1 year through 5 years 23,695,404 23,609,005
Due after 5 years through 10 years 35,420,218 35,281,448
Due after 10 years 19,728,073 18,807,315
Mortgage-backed securities 39,542,015 38,246,087
------------ ------------
$122,946,062 $120,516,504
============ ============
8
<PAGE>
6. Financial Instruments with Concentrations of Credit Risk
At September 30, 1996 and December 31, 1995, the Company held unrated or
less-than-investment grade corporate debt securities with carrying and fair
values as follows:
September 30, December 31,
1996 1995
----------- ----------
Carrying value $ 4,817,144 $5,092,566
=========== ==========
Fair value $ 4,817,144 $5,092,566
=========== ==========
Percentage of total assets 2.4% 2.8%
=========== ==========
7. Series B Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 400 shares, par value $10,000 classified as Series B,
issued and outstanding at September 30, 1996 and December 31, 1995. The Series B
preferred stock carries no interest and is convertible into common stock at
$2.25 per share.
8. Stockholders' Equity
Common Stock
The par value of common stock is $.01 per share with 20,000,000 shares
authorized for issuance. The shares issued and outstanding at September 30, 1996
and December 31, 1995 were 7,006,221 and 6,957,532, respectively.
Common Stock Warrants
At September 30, 1996 and December 31, 1995, the Company had 671,481 and
679,621 common stock warrants issued and outstanding, respectively, which are
registered under the Securities Exchange Act of 1934 (the "Act"). The warrants
have no par value and an exercise price to purchase common stock at $1.00 per
share.
The Company also has 2,015,760 outstanding common stock warrants which are
not registered under the Securities Exchange Act of 1934, with exercise prices
of $1.00 and expire on December 31, 1999.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Parent Company
On September 30, 1994, the Company entered into an agreement with its
commercial bank, under which it borrowed $800,000 on a one year term loan,
extendable by the Company for a second year. The loan is secured by the pledge
of 100% of the outstanding common stock of Quincy, the receivables of Quincy and
WorldNet and 9.9% of the outstanding common stock of American Progressive. The
loan bore interest at 2.0% over prime. The Company renegotiated this loan with
the bank in October, 1996. The new loan is for $800,000 with a one year term,
extendable by the Company for a second year with a final maturity at December
31, 1998. The loan is secured by the same collateral discussed above and the new
interest rate is 1.0% over prime.
Insurance Subsidiaries
American Progressive and American Pioneer are required to maintain minimum
amounts of capital and surplus as determined by statutory accounting ("statutory
capital"). The minimum statutory capital and surplus requirements of American
Progressive and American Pioneer as of September 30, 1996 for the maintenance of
authority to do business were $2,500,000 and $1,742,000, respectively, but
substantially more than this is needed to permit continued writing of new
business. At September 30, 1996 the adjusted statutory capital and surplus,
including asset valuation reserve, of American Progressive and American Pioneer
were $8,449,000 and $13,912,000, respectively.
At September 30, 1996, the investment portfolios of the life insurance
subsidiaries included cash and short-term investments totaling $12,331,000, as
well as fixed maturity securities carried at their fair values which amounted to
$120,516,000 that could be readily converted to cash. These liquid investments
totaled more than $132,847,000 and constituted approximately 95% of the
Company's investments at September 30, 1996. At September 30, 1996, one fixed
maturity with a carrying value of $305,000 was non-income producing. All of the
Company's other investments were current in interest and principal payments. In
addition, the Company has no investment in any derivative instruments or other
hybrid securities that contained any off balance sheet risk or investments in
other securities whose market values and principal repayments would be highly
volatile to changes in interest rates, except for GNMA's, FNMA's and investment
grade corporate collateralized mortgage obligations.
WorldNet
On April 1, 1994 WorldNet purchased certain assets of Health Assistance
for Travelers, Inc.("HAT") and an affiliated corporation for Can. $625,000
(approximately U.S. $470,000), payable over five years. WorldNet also executed
an agreement with HAT and Ontario Blue Cross ("OBC") under which WorldNet
subcontracted HAT's obligations under certain service contracts between HAT and
OBC, and between HAT and other insurers. The note payable to HAT required annual
payments of Can. $125,000 (approximately U.S. $94,000) plus accrued interest,
beginning on April 1, 1994, and bore interest at 6%. In 1995, substantially all
of the assets of OBC (including the shares of OBC's subsidiary HAT) were
acquired by Liberty Mutual Insurance Company ("Liberty Health"). In February,
1996, WorldNet and Liberty Health agreed to terminate the service agreement
between OBC and WorldNet. In connection with the termination of the service
agreement, Liberty Health agreed to cancel the promissory notes executed on
April 1, 1994, which notes amounted to $370,000 at December 31, 1995. At the
same time, the Company wrote off certain corresponding assets, including the
value of the service agreement, which assets amounted to approximately $145,000.
The resulting net income from this transaction was approximately $225,000.
10
<PAGE>
Results of Operations
Nine Months Ended September 30, 1996
Net Income. For the nine months ended September 30, 1996, the Company
earned net income of $506,000 resulting in an earnings per share applicable to
common shareholders of $0.05. For the nine months ended September 30, 1995, the
Company reported net income of $1,410,000 resulting in net income applicable to
common shareholders of $0.13 per share.
Revenues. Total revenues decreased $503,000 to $33,119,000 for the nine
months ended September 30, 1996 compared to total revenues of $33,622,000 for
the nine months ended September 30, 1995. Premiums and policyholder fees earned
increased $86,000. Increase in premiums at American Progressive for senior
market supplemental health was $995,000 (gross premiums increased $2,061,000
while premiums ceded to reinsurers increased $1,066,000) and for New York State
DBL was $339,000. The increase in premiums for life insurance amounted to
$263,000 (gross premiums increased $3,275,000 while premiums ceded to reinsurers
increased $3,012,000) and for group dental amounted to $209,000. In addition,
premium income in the NAIU special accident pool participated in by American
Progressive increased $1,386,000 to $5,965,000. (In August, 1996, the Company
notified the accident pool of its intention to withdraw effective December 31,
1996.) The increase in these premiums of $3,192,000 was partially offset by the
decrease of $3,106,000 in American Pioneer and American Progressive's runoff
lines of business, particularly major hospital and other health premiums
inforce.
Net investment income increased $117,000, while realized gains on
investments decreased $444,000 to a gain of $173,000, compared to a gain of
$617,000 for the same period last year, primarily due to rising interest rates
in 1996.
Fee income for the nine months ended September 30, 1996 decreased $310,000
which decrease reflects the fees earned by WorldNet, primarily as a result of
the termination of the OBC contract. For the nine months ended September 30,
1996, the Company recognized $210,000 of deferred revenue compared to $163,000
recognized in the same period in 1995, which increase is due to the inclusion of
the deferred revenue generated by the reinsurance of the major hospital business
in June, 1995.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased $968,000 to $32,454,000 for the nine months ended September
30, 1996. The change in future policy benefits amounted to an increase of
$2,362,000. The increase in reserves for the nine months ended September 30,
1996 was $1,077,000 compared to a decrease of $1,284,000 for the nine months
ended September 30, 1995. This increase in the change in reserves is primarily
related to the increase in unearned premium reserves resulting from the increase
in senior market supplemental health premiums discussed above. Claims and other
benefits decreased approximately $852,000 resulting from the reduction of
$1,868,000 major hospital health claims incurred at American Pioneer (due to the
reinsurance of this block in June, 1995) and $398,000 runoff accident and health
claims at American Progressive. This reduction was partially offset by an
increase in the senior market supplemental health claims of $580,000, in claims
incurred at NAIU of $222,000 and in group dental claims of $260,000. Mortality
increased $352,000 for the nine months ended September 30, 1996.
The increase in deferred acquisition costs decreased $887,000 as a result
of a decrease in the amount of deferrable general expenses and a general
increase in the amortization of the deferred acquisition cost asset. Other
operating costs and expenses decreased $1,275,000. Expenses incurred by the
insurance subsidiaries during 1995 exceeded the 1996 amount by $46,000.
Commissions, new business expenses and premium taxes increased $83,000, while
the general overhead expenses decreased $129,000. The remaining decrease of
$1,229,000 results from a decrease of continuing operation expenses incurred by
WorldNet ($912,000 resulting from the decrease in fee revenue) and a decrease by
the Parent Company ($317,000). Amortization of the present value of future
profits was approximately $153,000 in the first nine months of 1995.
11
<PAGE>
Results of Operations
Three Months Ended September 30, 1996
Net Income. For the three months ended September 30, 1996, the Company
earned net income of $101,000 resulting in an earnings per share applicable to
common shareholders of $0.01. For the three months ended September 30, 1995, the
Company reported net income of $320,000 resulting in net income applicable to
common shareholders of $0.03 per share.
Revenues. Total revenues increased $660,000 to $12,289,000 for the three
months ended September 30, 1996 compared to total revenues of $11,629,000 for
the three months ended September 30, 1995. Premiums and policyholder fees earned
increased $710,000. Increase in premiums at American Progressive for senior
market supplemental health was $41,000 (gross premiums increased $445,000 while
premiums ceded to reinsurers increased $404,000) and for New York State DBL was
$105,000. In addition, American Progressive's premium income in the NAIU special
accident pool increased $1,097,000, its runoff accident and health premiums
increased $100,000 and its life premiums increased $140,000. The increase in
these premiums of $1,483,000 was partially offset by the decrease of $714,000 in
American Pioneer`s premiums for life insurance (gross premiums increased
$708,000 while premiums ceded to reinsurers increased $1,422,000) and $59,000 in
American Pioneer's major hospital premiums.
Net investment income increased $167,000, while realized gains on
investments decreased $136,000 to a gain of $78,000, compared to a gain of
$214,000 for the same period last year, primarily due to rising interest rates
in 1996.
Fee income for the three months ended September 30, 1996 decreased $71,000
which decrease reflects the fees earned by WorldNet, primarily as a result of
the termination of the OBC contract. For the three months ended September 30,
1996, the Company recognized $70,000 of the deferred revenue compared to $80,000
recognized in the same period in 1995, which decrease is due to the decrease in
the related business inforce.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased $995,000 to $12,139,000 for the three months ended
September 30, 1996. The change in future policy benefits amounted to an increase
of $290,000. The increase in reserves for the three months ended September 30,
1996 was $1,035,000 compared to $745,000 for the three months ended September
30, 1995. This increase in the change in reserves is primarily related to the
increase in unearned premium reserves resulting from the increase in senior
market supplemental health premiums discussed above. Claims and other benefits
increased approximately $302,000 resulting from an increase in the senior market
supplemental health claims of $114,000, in life mortality of $347,000, in claims
incurred at NAIU of $327,000 and in group dental claims incurred at American
Pioneer of $22,000. This increase was offset by the reduction of $164,000 in
American Pioneer's major hospital health claims and $344,000 runoff accident and
health claims at American Progressive.
The increase in deferred acquisition costs decreased $600,000 as a result
of a decrease in the amount of deferrable general expenses and an increase in
the amortization of the deferred acquisition cost asset. Other operating costs
and expenses decreased $146,000. Expenses incurred by the insurance subsidiaries
during 1996 exceeded the 1995 amount by $198,000. Commissions, new business
expenses and premium taxes decreased $43,000, while the general overhead
expenses increased $241,000. This increase of $198,000 was offset by a decrease
of $344,000 resulting from a decrease of continuing operation expenses incurred
by WorldNet ($244,000 resulting from the decrease in fee revenue) and a decrease
by the Parent Company ($100,000). Amortization of the present value of future
profits was approximately $51,000 in the three months ended September 30, 1995.
12
<PAGE>
Investments
The Company's investment policy is to balance the portfolio between
long-term and short-term investments so as to continue to achieve the highest
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, which laws prescribe the nature, quality of and limitations
on various types of investments which may be made. Current policy is to invest
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) or BBB- (Standard & Poors) or better with the intent to hold them for
long term investment. However, the Company recognizes as a result of changes in
economic factors, such as changes in interest rates, cash flow needs, regulatory
requirements or the credit worthiness of particular issues, the Company may from
time to time decide to sell certain securities prior to their scheduled
maturities.
The Company invests its funds primarily in fixed income securities and has
invested in a limited number of non-investment grade securities which provide
higher yields than investment grade securities. As of September 30, 1996 and
December 31, 1995, the Company held unrated or less-than-investment grade
corporate debt securities of approximately $4,817,000 and $5,093,000,
respectively. These holdings amounted to 3.4% of total investments and 2.4% of
total assets at September 30, 1996 compared to 3.8% of total investments and
2.8% of total assets at December 31, 1995.
13
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
PART II - OTHER INFORMATION
NONE
_________________________________________
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL AMERICAN FINANCIAL CORP.
By: /s/ Robert A. Waegelein
-----------------------
Robert A. Waegelein
Senior Vice President
Chief Financial Officer
Date: November 13, 1996
14
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 120,516,504
<DEBT-CARRYING-VALUE> 120,516,504
<DEBT-MARKET-VALUE> 120,516,504
<EQUITIES> 18,353
<MORTGAGE> 883,884
<REAL-ESTATE> 0
<TOTAL-INVEST> 140,278,247
<CASH> 12,564,739
<RECOVER-REINSURE> 25,025,702
<DEFERRED-ACQUISITION> 18,782,328
<TOTAL-ASSETS> 199,331,020
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 24,140,441
<POLICY-HOLDER-FUNDS> 133,233,886
<NOTES-PAYABLE> 0
0
4,000,000
<COMMON> 70,062
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<TOTAL-LIABILITY-AND-EQUITY> 199,331,020
28,231,838
<INVESTMENT-INCOME> 2,233,461
<INVESTMENT-GAINS> 173,133
<OTHER-INCOME> 2,270,608
<BENEFITS> 16,678,786
<UNDERWRITING-AMORTIZATION> (1,755,621)
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<INCOME-PRETAX> 664,819
<INCOME-TAX> 158,548
<INCOME-CONTINUING> 506,271
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